In Defense of Shareholder Capitalism.

• Author: Murray, Phil R.

The Profit Motive: Defending Shareholder Value Maximization

By Stephen M. Bainbridge

223 pp.; Cambridge University Press, 2023

Executives of the Business Roundtable used to proclaim that the purpose of a corporation is to earn profits for stockholders. Then, in 2019, they changed their purpose statement to emphasize a commitment to "customers," "suppliers," "the community," and "the environment," along with "shareholders." That change prompted University of California, Los Angeles law professor Steven M. Bainbridge to write The Profit Motive: Defending Shareholder Value Maximization. He states, "My goal is to put forward an unabashed defense of the proposition that the purpose of a corporation is to sustainably maximize shareholder value over the long term."

The book examines the conflict between advocates of shareholder capitalism and advocates of stakeholder capitalism. The former advance Milton Friedman's idea that "The Social Responsibility of Business Is to Increase Its Profits," to borrow the title of his (often misunderstood) 1970 New York Times Magazine essay. The latter argue for corporate social responsibility (CSR) and environmental, social, and governance (ESG) issues. There are multiple definitions of both CSR and ESG, and different views of the effects each has on a corporation's bottom line. Bainbridge adopts no single definition of either. The salient feature of CSR and ESG is what they have in common: an emphasis on the interests of stakeholders such as workers and members of the community.

Bainbridge bases his approach on "law, history, and economics." Take his explication of the Michigan case Dodge v. Ford Motor Company. In 1916, Henry Ford announced the company would cut its dividend payment, using the automaker's massive cash reserves to build another factory, lower automobile prices, and continue to pay workers high wages. Brothers John and Horace Dodge, who had recently expanded from being auto parts suppliers to making their own automobiles and who were also early investors in Ford, objected to the plan. As shareholders, they took Ford to court for two reasons: to stop the construction of the factory and to make Ford resume paying dividends. The Dodge brothers won their case at the lower court level, and Ford appealed.

Bainbridge documents that Henry Ford's "stated goal was to do 'as much good as we can, everywhere, for everybody concerned ... [a]nd incidentally to make money.'" In 1919, the Michigan Supreme Court decided that Ford's directors neglected to make the interests of stockholders a priority, as they were legally required to do, and ordered Ford to reinstate dividend payments. However, the higher court reversed the part of the lower court's decision that prevented Ford from building the...