1.1. Ethics in the Corporate Context

In contemporary public discourse about corporate behavior, “ethics” is frequently identified with pro-social or altruistic activities. In some cases, ethics is associated with corporate charitable contributions or sponsorships. In other cases, ethics is associated with companies with “purpose,” whose primary aim is to promote prosocial goals or the well-being of the corporation’s stakeholders.

This is not how I will use “ethics” in this paper. When I talk about “ethics” in the context of corporations’ activities, which is arguably the primary sense of this term, I will have in mind the duties and obligations owed by corporations (and the individuals acting on their behalf). Such obligations have more to do with avoiding evil than with doing good; they are rooted mostly in what one may call “basic decency,” not in “altruism.”Footnote ²

These ethical imperatives apply to any organization regardless of its purpose; they do not require a profit-oriented firm to endorse pro-social purposes or make significant investments in charitable causes. Such imperatives, however, do impose constraints (sometimes significant) on the available strategies that for-profit firms can use to pursue profit.

In what follows, I will defend, first, that the corporation’s moral obligations often go beyond its legal obligations and, second, that these moral obligations will sometimes be profit-sacrificing in the short and long term.

1.2. Law and Ethics

Sometimes it is argued that abiding by a country’s legal standards is sufficient for a corporation to ensure appropriate ethical conduct. Several arguments can be buttressed to defend this perspective. On the one hand, there is a tight connection between law and ethics. In any well-developed legal system, much of what is unethical in business is also illegal. On the other hand, the regulative power of the law goes beyond the strict limits of what is actually encoded on the books; there are many instances where the law will not explicitly prohibit certain unethical behavior, but the risks of engaging in it are high enough to prevent corporations from doing so (Paine Reference Paine1994, 108). First, companies will sometimes avoid engaging in legal and unethical conduct, given that such conduct invites regulation that will be costly and unwelcome. Second, unethical conduct that is considered legal may turn out to be illegal because of the clever ways in which regulators can apply existing law to new cases. Finally, in countries like the US, executives of corporations that violate ethical norms find during lawsuits that what their lawyers considered legal, a jury may determine to be unlawful.Footnote ³

However, even though it is unquestionable that one of the law’s most important functions is to constrain unethical behavior, believing that the legal system will constrain all such behavior fails to recognize a variety of instances where there are gaps, often significant, between the legal and ethical obligations of corporations (Heath et al. Reference Heath, Moriarty and Norman2010, 446; McAdams Reference McAdams2015, 144–47; Moriarty Reference Moriarty2022, 5; Paine Reference Paine1994, 111; von Kriegstein Reference von Kriegstein2019, 112, 120–24). There are at least five different sets of reasons for this.

First, in a well-functioning legal system, the law is meant to reflect a certain social agreement on the duties and obligations that society wants the state to enforce (McAdams Reference McAdams2015, 144). However, not all duties and obligations on which there is social agreement should be enforced by the state. Moreover, there are ethical issues on which there is no social agreement and which are not encoded into law. Consequently, a legal regime should be seen as reflecting, at best, a moral minimum that lays out the legal obligations by which all members of society agree to be held accountable by the state, a moral minimum that does not (and should not) regulate everything taking place in our moral landscape.

Second, equating a corporation’s ethical obligations with its legal obligations presupposes a well-developed and uniform legal system. However, in our global economy, corporations often operate in countries that fail to properly regulate the ethical obligations by which business actors should abide (Paine Reference Paine1994, 110). In addition, most laws are local to particular jurisdictions and, thereby, only constrain the corporation’s behavior within it. It is misguided to think that the patchwork of laws across jurisdictions will capture the moral obligations of global corporations or provide clear moral guidance on how they should behave in the global environment.

In addition, equating law and ethics is naive about the lawmaking process, even in countries with well-developed legal systems. While some laws reflect an agreed moral minimum that society wants the state to enforce, other laws are the product of messy political processes that reflect the influence of special interests, not the ethical concerns of society. There are countless instances where corporations have influenced policy in their favor, sometimes causing significant public harm.Footnote ⁴

Furthermore, laws are often reactive. There are indeed cases where companies comply with moral obligations that are not encoded into law to prevent costly or burdensome regulations. But, it is overtly optimistic to think that this will always be the case; many companies are willing to explore how far they can push the envelope.Footnote ⁵ In addition, there are also many laws that lag behind technological advances (Paine Reference Paine and Kaptein2024). Some of these lags are valuable in that they allow the technology to develop without interference from legislators and regulators that may cripple its potential. But these lags open up opportunities for corporations to act against moral obligations that may not have been encoded into law.

Third, even when society may agree on certain moral obligations and prohibitions, there are sometimes very good reasons to avoid legislating or enforcing them. The law is a blunt instrument, a powerful club to prevent serious ethical violations, not a precise scalpel to track all the complexity and nuance of our ethical landscape (Hart and Zingales Reference Hart and Zingales2017; Heath Reference Heath2007; Mejia Reference Mejia2021a; Moriarty Reference Moriarty2022; von Kriegstein Reference von Kriegstein2019). Many important ethical issues are difficult to regulate, “cumbersome to enact, and costly to enforce” (Heath Reference Heath2023, 15; cf. Macey Reference Macey2008, 181; Moriarty Reference Moriarty2022, 5; Hughes Reference Hughes2023, 478). Moreover, because regulation sometimes “imposes nonnegligible compliance costs,” there will be cases where “simple feasibility constraints preclude a regulatory solution” (Heath Reference Heath2023, 15). For instance, it is very difficult to regulate respect for human dignity (Hart and Zingales Reference Hart and Zingales2017, 249) or advertising that is deceptive without being false (Heath Reference Heath2007).

Fourth, because “the law is intrusive and bothersome” (Moriarty Reference Moriarty2022, 5), there are good reasons to keep some ethical obligations out of the reach of the state. In addition, there are corporate actions whose ethical credentials are contentious, actions where there may be significant disagreements among reasonable people on whether they should be obligatory, permitted, or prohibited. These types of actions should not, for good reason, be regulated by the legal system. But corporations will sometimes need to take a stance concerning them and act accordingly.

Finally, the idea that the law can, on its own, ensure proper ethical conduct fails to recognize the important role that ethics plays in legal compliance. As Heath eloquently writes:

All of this entails that the law is insufficient to constrain all unethical corporate behavior. Therefore, if we want corporations’ activities to pass ethical muster, it is insufficient to ask them to merely comply with the letter of the law. They also need to uphold a variety of moral norms that are not encoded into law.

1.3. Ethics and Profits

It is sometimes suggested that reputational and financial costs associated with unethical behavior are enough to ensure proper corporate moral compliance. Influential scholars have argued that a corporation that intends to maximize its long-term market value will need to maximize the value created for all stakeholders or, at the very least, make sure not to mistreat them (Bainbridge Reference Bainbridge2023a, 129, 133; Jensen Reference Jensen2002, 246; Sharfman Reference Sharfman2017, 60). There is some truth to this view, but the truth is partial. There are, of course, multiple examples where corporations decrease their pollution or provide safer working conditions to attract consumers, avoid boycotts from employees, or prevent reputational backslash. But it is naive to think that market forces alone will be sufficient to force profit-maximizing corporations to always comply with their moral obligations (Fancy Reference Fancy2021).

For instance, while it is true that a firm needs to offer compensation that is sufficiently attractive to entice contractors or employees, there are myriad cases where their lives are so precarious that what will attract them involves deeply exploitative conditions that are morally unacceptable (Berkey Reference Berkey2021, 46; Vrousalis Reference Vrousalis2018, 2; Zwolinski Reference Zwolinski2012, 156). Furthermore, while certain reputational concerns may lead a corporation to comply with some moral obligations, these concerns will not always guarantee proper corporate moral compliance. After all, not all unethical corporate behavior involves high reputational costs, and some reputational costs are lower than the costs of complying with what morality demands (Chandler et al. Reference Chandler, Polidoro and Yang2020).

1.4. Four Examples

Let me conclude this section by discussing four hypothetical examples that illustrate instances where the law and the pressure of markets are insufficient to ensure that a corporation will fulfill all of its moral obligations. In a liberal society, one should expect individuals to have divergent views about these obligations. Thus, not all readers will agree that, in all four examples below, corporations have the ethical obligation that their executives claim. In other words, the point of these examples is not to present unequivocal examples of corporate unethical behavior but to motivate that there are ethical convictions that may lead shareholders and corporate leaders to support profit-sacrificing decisions not required by law because they consider them morally obligatory.

2.1. What Is the BJR?

Shareholders have several ways to hold senior leaders accountable. One is the derivative suit, which allows any shareholder to sue on behalf of the corporation. Derivative suits are very often used by minority shareholders who need to challenge a board’s decision.

The BJR is a standard of judicial review that courts use to evaluate the merits of a judicial scrutiny into the facts of the derivative suit. I emphasized “judicial review” to highlight that the BJR is not used to evaluate whether the behavior of corporate leaders was appropriate; it is used to determine whether the plaintiff’s claims warrant an assessment by the court. According to one of the most frequently cited court decisions in this context, the BJR instructs judges to presume “that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company” (Smith v. Van Gorkom, 488 A.2d at 872 [Del 1985]; cf. Aronson v. Lewis, 473 A.2d 805, 812 [Del. 1984]).Footnote ¹⁵

The idea behind the BJR is that courts will abstain from evaluating corporate decisions by senior leaders unless the plaintiff can show that they breached their fiduciary duties (Sharfman Reference Sharfman2017, 68). Instances of this include cases where there is evidence that the decision may have involved fraud, potential self-dealing, lack of good faith, abuse of discretion, lack of independence, or gross negligence to become informed (Bainbridge Reference Bainbridge2023a, 34, 48–49; Horton Reference Horton2020, 861; Sharfman Reference Sharfman2017, 30, 39, 55).Footnote ¹⁶

It follows that while corporate law gives shareholders the legal means to sue senior leaders, the BJR makes it very difficult for them to succeed except in a narrow set of circumstances (Elhauge Reference Elhauge2005; Horton Reference Horton2020; Marens and Wicks Reference Marens and Wicks1999; Noked Reference Noked2012; Stout Reference Stout2012). The very limited set of cases under which courts will review a decision by corporate leaders explains why the BJR has been described as “nearly an iron-clad shield for directors of public corporations” (Smith Reference Smith1998, 286), a rule that provides “a safe harbor that makes both directors and their actions unassailable if certain prerequisites have been met” (Branson Reference Branson2002, 632), and an “abstention doctrine” that will typically require courts to abstain from reviewing directors’ decisions (Bainbridge Reference Bainbridge2004; Branson Reference Branson2002, 631; Sharfman Reference Sharfman2017, 55).

2.2. The BJR’s Significant Deference

Legal scholars have provided several reasons to explain why the BJR gives so much deference to senior leaders.

1. 1. The BJR recognizes that courts should not second-guess management decisions (Boatright Reference Boatright2017, 63; Horton Reference Horton2020, 859). Judges are not particularly qualified to assess the business decisions of corporate directors and officers; “they lack information, decision-making skills, expertise, and vested interest (i.e., stake in the company) relative to corporate management” (Sharfman Reference Sharfman2017, 46). Thus, it has been argued that judges’ deference to the authority of senior leaders appears as a necessity (Bainbridge Reference Bainbridge2023a, 34; Macey Reference Macey2008, 180–81; Horton Reference Horton2020, 860; Sharfman Reference Sharfman2017, 28; Smith Reference Smith1998, 318).

2. 2. A deferential BJR incentivizes qualified individuals to serve as corporate directors or officers “without the fear of constantly facing potential liability for honest mistakes in judgment” (Sharfman Reference Sharfman2017, 30, 33, 37, 69; cf. Arsht Reference Arsht1979, 97). In addition, the BJR’s deference also encourages risk-taking by directors (Bainbridge Reference Bainbridge2004, 110; Horton Reference Horton2020, 860; Horton Reference Horton2021, 74–82).

3. 3. The BJR prevents derivative suits from flooding the courts, ensuring that courts are not confronted with an unreasonable influx of lawsuits (Horton Reference Horton2020, 861; Arsht Reference Arsht1979, 95). From this perspective, “the rule is a means for conserving judicial resources, thereby permitting courts to avoid being weighed down in rehashing decisions that are inherently subjective and ill-suited for judges, as opposed to business men and women” (Branson Reference Branson2002, 632).

4. 4. Finally, corporate law is meant to regulate private commercial exchanges. The BJR reflects courts’ “respect for the private ordering of corporate governance arrangements” (Sharfman Reference Sharfman2017, 43–44, 55). The reason why courts should stay out of these private exchanges is not merely, as Macey (Reference Macey1997) suggests, that laws that try to regulate private exchanges are often welfare-reducing. In liberal societies, there is an understanding that the protection of individual liberties requires the state to refrain from interfering and regulating private affairs. Consequently, “[c]ourts understand that this private ordering has been agreed to under the sanction of statutory corporate law and will feel compelled to respect the wishes of those parties to have the Board manage the company with minimal interference, including interference from the courts” (Sharfman Reference Sharfman2017, 44).

3.1. Profit Maximization and the BJR

Nearly all scholars agree that, as a practical matter, the BJR ends up giving senior leaders the necessary wiggle room to make decisions motivated by moral considerations, even if these considerations are not encoded into law and complying with them is expected to be profit-sacrificing in the short and long term (Boatright Reference Boatright2017; Elhauge Reference Elhauge2005; Kraakman et al. Reference Kraakman, Armour and Davies2017; Marens and Wicks Reference Marens and Wicks1999; Stout Reference Stout2012).Footnote ¹⁷ However, even though nearly all scholars in the debate agree that the BJR has the effect of giving senior leaders such necessary leeway, they disagree about the extent to which senior leaders can do this transparently.

The disagreement about the extent to which senior leaders can transparently pursue decisions that are profit-sacrificing is rooted in a much more general disagreement concerning whether managers are supposed to focus their efforts on maximizing profits or whether there are other ends that they can also pursue. More precisely, the disagreement concerns whether Delaware’s standard of managerial conduct is (or is not) shareholder value maximization. In what follows, I will use SVM as an acronym for “shareholder value maximization standard of managerial conduct.” Scholars sometimes refer to SVM as “stockholder welfare maximization,” “shareholder value,” “profit maximization,” or “wealth maximization.” While each of these formulations has slightly different conceptual contours, what is important for my discussion is whether managers have an imperative to maximize shareholders’ return on their investment.Footnote ¹⁸

One group of scholars defends SVM as Delaware’s standard of managerial conduct (e.g., Bainbridge Reference Bainbridge2008, Reference Bainbridge2023a; Clark Reference Clark1986; Easterbrook and Fischel Reference Easterbrook and Fischel1991; Horton Reference Horton2020; Mocsary Reference Mocsary2017; Sharfman Reference Sharfman2014, Reference Sharfman2017; Yosifon Reference Yosifon2013). The other group denies it (e.g., Blair and Stout Reference Blair and Stout1999; Elhauge Reference Elhauge2005; Marens and Wicks Reference Marens and Wicks1999; Stout Reference Stout2012). Nearly all business ethics scholars agree with the second group. Because this is such a widely held belief in the field of business ethics, I will need to spend some time closely discussing the arguments that have been used to substantiate it. In this section, I will present what are arguably the two most important arguments provided by critics of SVM. The first seeks to undermine the legal weight that most Delaware corporate law scholars have given to Dodge v. Ford. The second suggests that the BJR allows managers to pursue objectives other than profits. In the subsequent section, I will show why these arguments are mistaken.

3.2. Dodge v. Ford

The Michigan Supreme Court’s 1919 decision in the famous Dodge v. Ford case has been “routinely offered as Exhibit A” to defend the profit-maximization standard of managerial conduct (Stout Reference Stout2012, 26; cf. Marens and Wicks Reference Marens and Wicks1999, 278). This case has been cited approvingly by influential legal scholars such as Bainbridge (Reference Bainbridge2008, 141) and Clark (Reference Clark1986, 678–679). Although Dodge v. Ford is a Michigan case and, as such, does not provide binding legal precedent for Delaware courts, this case has played a very prominent role in the discussion among legal scholars defending or criticizing whether Delaware law supports SVM.Footnote ¹⁹ Any discussion of this issue would be amiss if it did not engage with it.

The judge’s opinion in this case offers what most corporate law scholars have taken to be a very clear formulation of SVM:

Lynn Stout, whose work “established her as the twenty-first century’s leading critic in the legal academy of shareholder value maximization on both positive and normative grounds” (Bainbridge Reference Bainbridge2023a, 14), has been very influential in downplaying the importance and relevance of this case. She does not deny that the judge’s opinion supports SVM. However, she highlights that such opinion appears in the ruling as “mere dicta—a tangential observation that the Michigan Supreme Court made in passing” and should, therefore, not be seen as constituting legal precedent (Stout Reference Stout2012, 26).

Moreover, Stout argues that the implications of this case have been misinterpreted. According to her, the case is not about the legal duties that managers owe to shareholders in a public company; it is about the legal duties that controlling majority shareholders owe to minority shareholders, in this case, the fiduciary obligations of Henry Ford to the Dodge brothers (Stout Reference Stout2012, 26; cf. Blair and Stout Reference Blair and Stout1999; Elhauge Reference Elhauge2005).

Finally, Stout highlights that this case took place in Michigan, a state that has become “something of a backwoods of corporate jurisprudence” (Stout Reference Stout2012, 27). Moreover, she mentions that, in the 30 years before she wrote her criticism, the Delaware court had cited Dodge v. Ford only one time, and had cited it in a case concerning the duties that controlling shareholders owe minority shareholders, not a case about the standard of managerial conduct (Stout Reference Stout2012, 27).

3.3. The BJR’s Discretion

A second influential argument offered to challenge SVM hangs on the discretion provided by the BJR. According to this argument, “under the business judgment rule, courts are extraordinarily willing to sustain decisions that apparently sacrifice profits” (Elhauge Reference Elhauge2005, 771).

The force of this argument is often bolstered by appealing to Shlensky v. Wrigley, a case where the court upheld the decision of the board of the corporation owning the Chicago Cubs to avoid holding games at night (80 percent of its stock was owned by its president, Phillip K. Wrigley).Footnote ²⁰ The plaintiff alleged:

Scholars who reject SVM believe that Shlensky v. Wrigley provides strong arguments against SVM, given the compelling reasons that the plaintiff gave to support a profit-enhancing rationale for installing lights (I cite directly from the case):

1. 1. “[A]ttendance at Cubs’ home games has been substantially below that at their road games, many of which were played at night.”

2. 2. A comparison of the attendance at Cub’s and White Sox’s games shows that “The weekend attendance figures for the two teams were similar [when both teams played day ball]; however, the White Sox week-night games drew many more patrons than did the Cubs’ weekday games.”

3. 3. “[T]he funds for the installation of lights can be readily obtained through financing and the cost of installation would be far more than offset and recaptured by increased revenues and incomes resulting from the increased attendance.”

4.1. Reply to Dodge v. Ford

In response to Stouts’ claims on Dodge v. Ford, Macey (Reference Macey2008, 178) has argued that “[t]he case is not a doctrinal oddity. Dodge v. Ford still has legal effect, and is an accurate statement of the form, if not the substance, of the current law that describes the fundamental purpose of the corporation.” Bainbridge (Reference Bainbridge2023a, 65) mentions that even though the case concerns controlling shareholders oppressing minority shareholders, “[t]he bulk of contemporary scholarship treated Dodge as stating a rule applicable to corporations generally rather than as one announcing a rule confined to close corporations.” Bainbridge has also argued that the judge’s value maximization remark was not an offhand remark that should be interpreted as dicta (Bainbridge Reference Bainbridge2023a, 51) and that the SVM was well established at the time, as shown by the fact that “[i]n a number of pre-Dodge cases, acts that today would be regarded as socially responsible were challenged as being ultra vires” (Bainbridge Reference Bainbridge2023a, 51–52). Mocsary, in turn, argues that even if the case’s explicit statement of corporate purpose were dicta, this dictum “made explicit that which had been an implicit and axiomatic part of the common law and general societal agreement” (Mocsary Reference Mocsary2017, 1344). He cites, for instance, several Michigan cases that support SVM.Footnote ²¹ In addition, he provides some historical background to substantiate that the managerial scandals of the beginning of the twentieth century “provided an opportunity for all facets of society to express their views on the topic” (Mocsary Reference Mocsary2017, 1346). However, during such debates, SVM was not challenged. Mocsary adds that this understanding continues to this day, something that Stout acknowledges when she grants that SVM is the received view among journalists, economists, business observers, and legal scholars. Moreover, and as Sharfman (Reference Sharfman2014, 393) notes (following Gordon Reference Gordon2007), SVM has actually “been reinforced by the transition over the last sixty years from a typical corporate board of a public company comprised of a minority of independent directors to one that is dominated by them, allowing for a dramatic shift in board focus from managerialism, i.e., the goals of management, to shareholder wealth maximization.”

What is perhaps more important, however, is that Dodge v. Ford is no longer “Exhibit A” (Stout Reference Stout2012, 26) to establish Delaware’s profit-maximization standard of managerial conduct. Exhibit A for SVM is now Delaware’s 2010 decision in eBay v. Newmark, a case that has been described as “a decisive affirmation that shareholder wealth maximization is the only legally permissible objective of a for-profit corporation” (Boatright Reference Boatright2017, 52; cf. Mocsary Reference Mocsary2017; Silver Reference Silver2022; Wishnick Reference Wishnick2012).Footnote ²² Craig Newmark, Craigslist founder, was an active participant in the Whole Earth ‘Lectronic Link virtual community (WELL), “whose counterculture ethos sought to realize the liberating potential of personal computing” (Boatright Reference Boatright2017, 53). “[H]is almost total lack of interest in wealth and his genuine desire to help others were reflected in the way the new company did business” (Boatright Reference Boatright2017, 53). While he initially considered incorporating as a not-for-profit, “he decided that nonprofits were too confined by rules and that he could always give away his money if he made too much” (Boatright Reference Boatright2017, 54). To this day, Craigslist claims to use a “.org” domain because “[i]t symbolizes the relatively uncommercial nature of craigslist, as well as our service mission and non-corporate culture.”Footnote ²³ The company website describes its chief executive officer, Jim Buckmaster, as “[p]ossibly the only CEO ever described by the business press as anti-establishment, a communist, and a socialistic anarchist.”Footnote ²⁴

Because of a turn of events that Craigslist founders did not anticipate, eBay acquired a minority stake in the company in 2004. eBay wanted Craigslist to pursue various profitable opportunities (such as charging for more services and expanding internationally) that Jim and Craig, the majority owners, resisted.Footnote ²⁵ To stop eBay from gaining control of the company, Jim and Craig instituted a series of defensive measures, including a poison pill. These defensive measures led eBay, in 2008, to sue Jim and Craig for breaching their fiduciary duties they owed to eBay as a minority shareholder.Footnote ²⁶

In the lawsuit, Craig was clear that eBay’s profit-maximizing ambitions were opposed to Craigslist’s distinctive culture, a culture that was not focused on maximizing profits but on providing a useful public service (Boatright Reference Boatright2017, 53).

When reviewing the poison pill, the judge was very clear that poison pills “are defensive devices that, if used correctly, can enhance stockholder value but, if used incorrectly, can entrench management and deter value-maximizing bidders at the stockholders’ expense” (eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 28 [Del. Ch. 2010]). Throughout his discussion, the judge repeated again and again that this poison pill would have been acceptable if it had been instituted with the goal of promoting stockholder value (eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 28, 29, 31, 33, [Del. Ch. 2010]). Towards the end of his analysis of the poison pill (i.e., the Rights Plan) the judge was unequivocal:

The judge criticized the defendants because they failed to show “that there was a sufficient connection between the craigslist ‘culture’ (however amorphous and intangible it might be) and the promotion of stockholder value.” It concluded that Craigslist founders “failed to prove at trial that they acted in the good faith pursuit of a proper corporate purpose” (eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 [Del. Ch. 2010], emphasis in the original). The court added that Jim and Craig found the possibility of eBay acquiring a controlling interest in Craigslist “unpalatable, not because of how it affects the value of the entity for its stockholders, but rather because of their own personal preferences” (eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 [Del. Ch. 2010]).Footnote ²⁷

Thus, even if we remove Dodge v. Ford from the face of corporate purpose jurisprudence (something that, as I mentioned, is far from clear we are justified to do), eBay v. Newmark, a relatively recent Delaware’s court decision, provides additional and very strong evidence to support SVM.Footnote ²⁸

4.2. Reply to the BJR’s Discretion

Let me now respond to the claim that the BJR’s discretion shows that SVM is not mandated by Delaware. As I mentioned above, nearly all scholars involved in this debate recognize that, under the BJR, “directors have close to a free hand when considering matters … [with] broader social or environmental implications” (Noked Reference Noked2012) and that “the business judgment rule makes plain that the duty of care cannot be enforced in a way that would bar managers from exercising discretion to sacrifice corporate profits in the public interest” (Elhauge Reference Elhauge2005, 770).

However, this is a flawed argument to challenge SVM; it conflates a standard of managerial conduct with a standard of judicial review (Bainbridge Reference Bainbridge2023a, 59, 67–70; Mocsary Reference Mocsary2017, 1349). As Sharfman (Reference Sharfman2017, 67) argues, a corporate “decision will rarely lose the protections of the [Business Judgment] Rule just because the decision was sub-optimal in terms of SVM. … However, this does not mean that the courts are not focused on SVM as the objective of a Board’s fiduciary duties per se; it simply means that courts must restrain themselves in making such a determination.”Footnote ²⁹ In an ideal world, where courts had unlimited resources and judges were omniscient and impartial, it would be possible for both standards to coincide. However, and as Macey (Reference Macey2008, 190) points out, “the rule of wealth maximization for shareholders is virtually impossible to enforce as a practical matter.” In addition, there are good reasons (provided in Section 2.2) that explain why the BJR provides such a level of discretion to managers.

None of this undermines the fact that, when it comes to Delaware’s standard of managerial conduct (not the standard of judicial review), eBay v. Newmark provides strong support for SVM.Footnote ³⁰ And while Shlensky v. Wrigley may initially lead one to doubt SVM, a closer look at this case actually supports it. As I will now argue, many of the judge’s arguments dismissing the plaintiff’s case are grounded precisely on considerations about SVM.

For instance, the judge provided an explanation of how installing lights may affect the long-term profitability of the Cub’s franchise.

Additionally, the judge criticizes the plaintiffs for failing to provide sufficient evidence that installing these lights would produce long-term profits.

Thus, the judge’s opinion on this case is strongly grounded on SVM. If anything, what Shlensky v. Wrigley may be said to establish is that managers are not required to maximize profits in the short term. As such, Shlensky v. Wrigley is one among many other cases that reject short-term shareholder value maximization as a managerial standard.Footnote ³¹

It is worth noting that several of the scholars who deny SVM seem to acknowledge this point. Noked (Reference Noked2012), for instance, claims that “for the vast majority of corporate decisions, there is no legal restriction on directors’ ability to consider the interests of other stakeholders. [However, Delaware courts require] that a business decision bear some rational relationship to a long-term corporate and shareholder interest before applying the business judgment rule to shield the decision from shareholder challenge” (my emphasis). Similarly, Elhauge (Reference Elhauge2005, 770) grants that “under the business judgment rule, courts are extraordinarily willing to sustain decisions that apparently sacrifice profits (at least in the short run) on the ground that they may conceivably maximize profits (at least in the long run)” (my emphasis).

I have responded to what are, arguably, the two most influential arguments against SVM. My discussion, however, is not meant to establish in a definite way that SVM is Delaware’s standard of managerial conduct. Doing so would require me to engage with several additional arguments that challenge it.Footnote ³² My aim is more modest: to destabilize the received view among many management and business ethics scholars that senior leaders are not required by law to maximize profits. Although my discussion does not unequivocally establish that SVM is Delaware’s standard of managerial conduct, it should have shown that SVM represents a compelling interpretation of the law. As I will show, this has important implications for how senior leaders will justify corporate decisions motivated by morality.

4.3. SVM and the Ethical Limits to Profit Maximization

Before doing so, however, I would like to pause to discuss a peculiar feature of the scholarly discussion of the ethical limits to profit maximization, a feature that is also frequently reflected in popular discussions on the topic.Footnote ³³ By and large, the discussion about the role that, according to Delaware law, ethics plays in corporate decision-making has been divided into two camps. On the one side are those who (sometimes disapprovingly) argue that Delaware corporate law is committed to SVM. These scholars often assume (either tacitly or explicitly) that, because of Delaware’s commitment to SVM, managers should only try to uphold ethical values when this is instrumental to increasing profits. On the other side of the debate are scholars who argue that Delaware allows managers to pursue a broader set of ends beyond profit maximization, goals that may include the promotion of certain ethical ideals.

What is peculiar about this discussion is that, by conceptualizing ethical values as an additional goal beyond or in addition to profit maximization, this discussion offers a false dichotomy that does not canvass the full conceptual space. In particular, it misses the specific (and important) possibility we have been exploring here: having profit maximization as the sole managerial goal, but recognizing that this goal is limited by legal and ethical constraints.

Take, for instance, The Profit Motive, Stephen Bainbridge’s recent book examining the purpose of the corporation. He opens the book’s second half by stating that he will review “the century-old debate over corporate social responsibility and shareholder value maximization” (Bainbridge Reference Bainbridge2023a, 85). He is correct that the dichotomy between corporate social responsibility and SVM characterizes a “century-old debate.” But he fails to recognize that this is a false dichotomy. SVM is opposed to corporate social responsibility only when one thinks of the latter as an additional goal that competes with SVM. But if one thinks of corporate social responsibility, not in terms of additional responsibilities that one takes for the well-being of society and its members, but in terms of the basic moral obligations that should guide the goal of profit maximization, then there is no opposition between the two.

This blind spot seems reflected in Delaware’s corporate law. Delaware courts are muted with respect to the issue I have been discussing. I know of no Delaware case or statute that defends or rejects that Delaware law permits (or requires) corporations to sacrifice profits when such profits violate ethical norms. Whenever the issue of corporate ethics comes up, it is typically conceptualized as an additional goal alongside profit maximization. As I elaborate below, the court’s silence on this matter is concerning and should be addressed.

5.1. How Managers Can Use the BJR to Promote Ethical Issues

Many scholars writing about the BJR acknowledge that the BJR allows senior leaders to make ethical decisions that may be profit-sacrificing in the short and long term. The laxity afforded by the BJR gives senior leaders “wide latitude to further the interests of non-shareholder constituencies” (Kraakman et al. Reference Kraakman, Armour and Davies2017, 99), “considerable implicit and explicit discretion to sacrifice profits in the public interest” (Elhauge Reference Elhauge2005, 733), “a free hand when considering matters that are most likely to have broader social or environmental implications” (Noked Reference Noked2012), and the power to pursue “social responsibility and even … a social benefit mission” (Boatright Reference Boatright2017, 53).Footnote ³⁴

Most of these scholars, however, also acknowledge that managers are allowed to do this only when “these actions are reasonably believed in good faith to promise some shareholder benefit” (Boatright Reference Boatright2017, 63) and “bear some rational relationship to a long-term corporate and shareholder interest” (Noked Reference Noked2012; cf. Kraakman et al. Reference Kraakman, Armour and Davies2017, 99; von Kriegstein Reference von Kriegstein2019, 115–16). From a practical perspective, however, it is easy for a CEO to show that the decision meets this requirement because “virtually any act that does not financially threaten the survival of the business could be construed as in the long-term best interest of shareholders” (Marens and Wicks Reference Marens and Wicks1999, 281). As Macey (Reference Macey2008, 190) has argued, “wealth maximization for shareholders is virtually impossible to enforce as a practical matter. The rule is aspirational, except in odd cases. As long as corporate directors and CEOs claim to be maximizing profits for shareholders, they will be taken at their word because it is impossible to refute these corporate officials’ self-serving assertions about their motives.”

If this is correct, it entails that managers, motivated to make ethical decisions that they expect to be profit-sacrificing, cannot be transparent about their motives. In other words, and as Moriarty (Reference Moriarty2014, 838) highlights, the corporation’s directors are free to implement ethically oriented decisions that are expected to be profit sacrificing “as long as they do not tell anyone about it. And if someone asks the directors why they made a particular decision? If they really did make it because they thought it was the right thing to … but not the best decision for [the economic interest of] shareholders, then they must conceal this information” (cf. Marens and Wicks Reference Marens and Wicks1999, 281).

Would this change if, as Stout suggests, SVM is an incorrect interpretation of the law and senior leaders are actually under no legal obligation to justify their ethical decisions by appealing to SVM? I don’t believe so, given how current corporate law is interpreted. Any prudent corporate leader (and their legal counsel) recognizes that SVM is not only a compelling interpretation of the law but one that is widely accepted. As Marens and Wicks (Reference Marens and Wicks1999, 281) themselves acknowledge, “no competent attorney would allow her client to argue in court that their corporation made a decision because it ‘was the right thing to do’ in the face of evidence that management knew of legal alternatives whose impact on the bottom line … were indisputably superior” (cf. Macey Reference Macey2008, 182–84). Thus, even if senior leaders (and their legal counsel) believe that SVM is a mistaken interpretation of the law, they would nevertheless act as if it was the correct interpretation.

Let me illustrate what I have been discussing in the context of our examples. In all four of them, senior leaders pursue a policy expected to be profit-sacrificing (in the short and long term) because they believe such a policy is morally obligatory (even if not mandated by law). While the policy has support from a majority of shareholders, it has left a minority shareholder disgruntled by the adverse financial effects on his investment. This shareholder files a derivative suit against the company’s senior leaders for breaching their fiduciary duties. In particular, he asks the judge for injunctive relief to compel the board to (in each example):

1. 1. Require Ethosphere Social to use its more engaging algorithm, despite its negative externalities.

2. 2. Pursue the rejected merger with Competitive Tech’s main rival despite its anticompetitive nature.

3. 3. Resume Democratic Financial’s business with LCO despite LCO’s antidemocratic methods and influence.

4. 4. Get Pro-Life Pharma to undertake the development of the cost-effective drug despite its likely abortifacient side effects.

How would the boards of these companies respond to such a challenge? Not by candidly acknowledging that these policies were motivated by moral reasons and were expected to be profit-sacrificing in the short and long term. As Macey (Reference Macey2008, 180) notes, “CEOs who testify in depositions and trials are better coached and more willing to dissemble than Henry Ford was.” Their lawyers would tell them that a candid admission may be interpreted by the court as an admission of breach of their fiduciary duty, given that Delaware courts have often equated the fiduciary responsibility to act “in the best interests of the company” with the mandate to “maximize shareholder value.”

Of course, any senior leader who is not utterly lacking in imagination would be able to come up with a plausible account that connects the pursuit of these policies with the maximization of profits. The bar to do this successfully is quite low because Delaware courts have been willing to defer to senior leaders’ words, even when external observers would find their accounts far-fetched or implausible.

Thus, if challenged in court:

1. 1. Ethosphere Social’s senior management could argue that these reforms were meant to enhance the company’s goodwill, strengthen its brand, and attract a larger and more loyal group of users.

2. 2. Competitive Tech’s leaders could say that they did not pursue the merger because they were confident it would be cheaper for the company to achieve market dominance by out-competing their rival.

3. 3. Democratic Financial’s leaders could say that they stopped working with LCO because this association was a liability for their plan to expand their operations into liberal states.

4. 4. Pro-Life Pharma’s executives may say that they avoided developing the abortifacient hair-loss treatment because they were afraid of becoming entangled in the cultural wars.

5.2. Why Using the BJR to Pursue Ethical Decisions Is Problematic

The lack of candor that the BJR seems to require is morally problematic. As Boatright (Reference Boatright2017, 63) notes, “[e]nabling corporate social responsibility is not the purpose of the business judgment rule.” The purpose of the BJR is to respond to practical considerations faced by judges needing to evaluate the standard of managerial conduct (Section 2.2). If, as most corporate law scholars believe, Delaware’s standard of managerial conduct is SVM, this means that senior leaders who use the BJR to fulfill profit-sacrificing corporate moral obligations would be undermining the spirit of law by acting against such standard. What is more, concealing and lying about the motivations and justifications for their decisions, in particular about the fact that they expect these ethically motivated decisions to be profit-sacrificing, can (and sometimes will) be considered corporate fraud.

Scholars like Marens and Wicks (Reference Marens and Wicks1999, 281) don’t seem particularly bothered by using the BJR in this fashion. They suggest that “courtrooms are not forums for the expression of deeply held moral philosophy. Lawyers are trained to make the most conservative, precedent-supported argument that can plausibly defend a particular act or policy.” Their view, however, is problematic in at least two ways.

First, this view fails to recognize that the law’s power and influence are not limited to what happens in the courtroom. Laws play a critical role in the moral education of citizens (Aristotle Reference Aristotle and Crisp2013, 1179b–1180a); they provide guidance to individuals about “how to organize their affairs” (Hughes Reference Hughes2013, 235); and they play an important communicative social role. For instance, the public’s understanding of seat belt usage is different in a jurisdiction that mandates it than in one that doesn’t (McAdams Reference McAdams2015).

Second, and perhaps more importantly, the BJR does not merely influence what takes place within the courtroom. It also affects what takes place outside of the courtroom. Corporate leaders’ word in court would have little weight if it contradicted their regular public pronouncements. Consequently, their lawyers would instruct executives to justify their ethical decisions based on their expected profit-enhancing potential in their annual and quarterly reports, earnings calls, regulatory filings, press releases, and so on (cf. Moriarty Reference Moriarty2014, 838).

Senior managers are extremely influential. They act as role models who subordinates emulate, and their behavior and communications often set standards of corporate conduct (Brown and Treviño Reference Brown and Treviño2006; Brown et al. Reference Brown, Treviño and Harrison2005; Mejia and Skorburg Reference Mejia and Skorburg2022). That corporate leaders are always justifying their ethically motivated activities based on how such activities impact the bottom line has led to an impoverishment of the role that ethics is meant to play in corporate activity. By justifying ethical corporate decisions because of their alleged profitability, the important role of ethics in the business context has been hollowed out. An EJR would play a valuable role to correct this by encoding into the law the role that ethical norms should play in corporate activity.

Ethical norms are not instrumental. They are supposed to be followed because they are demanded by morality (because it is wrong not to follow them); they are not meant to be followed because they are profitable or instrumental for some ulterior end. Moreover, ethical norms have an overriding normative force and involve considerations that trump one’s preferences, tastes, and personal interests (Mejia and Bonaldi Reference Mejia and Bonaldi2025, 6; cf. Hausman and McPherson Reference Hausman and McPherson1993, 688; Mejia Reference Mejia and Pava2024; Sen Reference Sen1977, 329). An ethical norm ought to be followed for its own sake, even if it is inconvenient and gets in the way of our desires and goals (Baker Reference Baker and White2019, 48; Hodgson Reference Hodgson2013, 78; Wight Reference Wight and White2019, 80). Having to ground an ethical decision on its expected profitability is instrumentalizing ethics and, thereby, undermining it.

When ethics is instrumentalized, it is effectively misconstrued, distorting the role it should play in our social life. As I suggested, ethical norms, unlike other types of norms and imperatives, are not instrumental. They are supposed to override and thwart one’s prudential goals and desires because morality demands it (not because doing so will be to one’s benefit or the benefit of shareholders). By instrumentalizing ethics, one also wrongs many of those with whom one interacts. Instrumentalizing ethics leads one to interact with others as mere means, basing one’s interactions with them only on the merits of the potential benefits they will bring to shareholders, and thereby failing to recognize their intrinsic worth.

7.1. The EJR undermines managerial accountability

It has been said that decades of corporate governance in the US have sought to “strike an equilibrium between shareholder power and managerial accountability” (Mocsary Reference Mocsary2017, 1349). One may think that the EJR breaks this balance, for example, by allowing corporate leaders to cloak self-serving decisions as motivated by the corporation’s moral obligations.

While this worry appears to have merit in theory, it is overstated in practice. The EJR would make very little difference to shareholders’ ability to hold senior leaders accountable because the current BJR already gives corporate leaders an enormous amount of deference, acting as a “nearly an iron-clad shield for directors of public corporations” (Smith Reference Smith1998, 286).

First, the bar for courts to review senior leaders’ decisions is very high. Mere negligence, for instance, is not enough to warrant courts’ review; shareholders need to show that gross negligence was involved. Second, in the very few cases where courts will be willing to review a shareholder complaint against senior leaders, they do not seek to evaluate whether senior decisions were optimal; they merely evaluate whether they were reasonable. And, here, again, the bar for a decision to be reasonable is very low. Third, when courts review corporate leaders’ decisions, their evaluation focuses on the process by which these decisions were taken, not on the content of such decisions. And, once again, the court’s review will clear senior leaders of wrongdoing if they secure what are often perfunctory and minimal procedural steps. Thus, if the EJR operated along the guidelines used by the BJR to evaluate profit-related activities, it would not significantly alter shareholders’ current limited ability to hold corporate leaders accountable.Footnote ³⁸

It is worth noting that with the recognition of the EJR as a dimension of the BJR, courts’ decisions on some of the most important cases concerning corporate purpose would not change. In particular, if the court adopted the EJR, the outcome of the decision in Dodge v. Ford and eBay v. Newmark would be the same. As I mentioned, the EJR does not relinquish profit maximization as the corporate objective. It simply recognizes that there are moral limits to how profits can be achieved. In Dodge v. Ford and eBay v. Newmark, the defendants acknowledged that they were relinquishing profit maximization as the corporate goal. Ford explicitly stated that his corporate policies aimed “to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes” (Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 [Mich. 1919]). Similarly, the founders of Craigslist made it clear to the court that “craigslist should not be about the business of stockholder wealth maximization, now or in the future” (eBay Dom. Holdings, Inc. v. Newmark, 16 A.3d 1, 34 [Del. Ch. 2010]).

Scholars have argued that Ford or Newmark would have avoided the court’s negative decision if they had defended that their decisions had been motivated by an effort to maximize the company’s profits in the long term (Boatright Reference Boatright2017; Macey Reference Macey2008). If Delaware were to adopt an EJR, and one agrees that E-SVM captures Delaware’s standard of managerial conduct, Ford and Newmark could have avoided the court’s negative decision by arguing that, while they recognized that their managerial imperative was to maximize profits, the decisions for which they are being sued respond to ethical constraints on this imperative.

These two cases, however, have interesting features concerning the plausibility of some of the arguments that senior leaders could adduce. The EJR would permit Ford to pay higher wages to its employees if this responds to a recognition that the current wages are exploitative. Under an EJR, however, the court’s verdict would not change if Newmark were to argue that the board’s reluctance to charge for more services was guided by the company’s “communist and socialistic” ethical principles or by the view that “corporations should not have a commercial nature.” Neither of these two justifications are compatible with an imperative to maximize shareholder value. Consequently, the court would not accept them as a legitimate application of the EJR.

7.2. The EJR Is Unnecessary

Some readers may suggest that an EJR is not necessary. They would argue that Delaware corporate law allows any corporate founder or majority group of shareholders to add to their corporate charter language empowering their corporate leaders to make ethically motivated decisions that can be profit-sacrificing in the short and long term. As such, the ability of managers to take moral considerations into account could be implemented on an ad hoc basis, without the need for an across-the-board implementation of the EJR by Delaware courts.Footnote ³⁹

There are two main problems with this proposal. First, it is risky. Not all changes in a corporate charter will be accepted as legitimate by a Delaware judge. Minority shareholders who disagree with this charter amendment (given its potential or real negative financial effects) may pursue a derivative suit or assert an appraisal rights claim. It is an open question whether the judge dealing with this challenge will find merit in the minority’s challenge. If there were an EJR, the judge would not find merit. But without any such rule, and because there is no precedent on this matter, this may lead the judge to interpret SVM narrowly, ruling that incorporating a clause allowing managers to make ethically motivated profit-sacrificing decisions into the corporate charter is incompatible with the profit-maximizing imperative of a general corporation.

Of course, Delaware judges may also rule that it is permissible to add into the corporate charter a clause empowering corporate leaders to make ethically motivated decisions expected to be profit-sacrificing in the short and long term. But this raises a second and important problem with this proposal: its ad-hoc nature.

According to this ad-hoc proposal, ethical norms should limit profit maximization only if this is explicitly added to the corporate charter. In doing so, courts would be expressing the view that the default managerial standard of conduct is SVM narrowly conceived. In other words, in this proposal, Delaware courts would be effectively saying that unless language is explicitly added to the corporate charter, ethical norms have no bearing on how companies may choose to maximize profits. Such a view is highly problematic because it misconstrues the role that ethics plays (and ought to play) in our social life. In particular, it fails to recognize that there are a variety of ethical duties and obligations that restrict how companies may be permitted to profit, duties that should be recognized by all corporate managers. After all, and as has been argued by numerous normative ethics scholars, if managers are acting on behalf of shareholders, this entails that they should not only promote their interests but also fulfill many of their moral obligations (Bowie Reference Bowie and Frederick2010; Dietsch Reference Dietsch2020; Goodpaster Reference Goodpaster1991; Hughes Reference Hughes2019; Langtry Reference Langtry1994; Mansell Reference Mansell2015; Mejia Reference Mejia2019; Ohreen and Petry Reference Ohreen and Petry2012; Pogge Reference Pogge1992; von Kriegstein Reference von Kriegstein2016). Thus, what is particularly problematic about this ad-hoc proposal is the kind of institutional message that it sends: it suggests that responding to moral norms is optional and that profits trump moral norms unless a majority of shareholders have explicitly chosen otherwise.