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Why Ben & Jerry’s Shareholder-Maximization Excuse is Erroneous

Raz Godelnik
| Thursday September 13th, 2012 | 2 Comments

Over the next couple of weeks, we’ve asked our writers (and guests) to respond to the question” What is the Social Responsibility of Business?”  Please comment away or contact us if you’d like to offer an opinion.

Throughout this series we have presented different perspectives on this question, showing that Milton Friedman’s and his successors’ one-dimensional approach to CSR is narrow and probably not the best one. I believe we manage to make a good case from ethical, philosophical, social and economic points of view. Yet, there’s one place we almost take for granted we can’t beat Friedman – the legal field.

After all, no matter how great CSR is, corporations still have a very strict fiduciary duty – to maximize profits for shareholders, right? While we tend to believe the answer is simply ‘Yes,’ there’s evidence that the answer is more complicated than that. The latest one comes from two law professors at Indiana University who write in the Stanford Social Innovation Review about the sale of Ben & Jerry’s to Unilever more than a decade ago.

This case became one of the most famous examples to CSR’s lack of legal merits. The argument was that no matter how reluctant founders Ben Cohen and Jerry Greenfield were to sell their socially responsible company (which was public at the time) to a big corporation that was committed only to maximizing its bottom line, they had no choice. The law, as Cohen and Greenfield explained, required the company’s board of directors to accept the highest bid no matter what. Not so fast say Prof. Antony Page and Prof. Robert Katz in their article. The underlying assumption of this story, they argue, is incorrect.

The perception behind the sale of Ben & Jerry’s, they explain, reflects the erroneous view that corporate directors must always act to maximize shareholder value. The most well-known support for this view, they write, comes from Dodge v. Ford, a 1919 decision from the Michigan Supreme Court, where the court opined that a “business corporation is organized and carried on primarily for the profit of the stockholders.” So why this wasn’t the case with Ben & Jerry’s as well?

Page and Katz offer two arguments, one that is more general and another that is more specific and relates to the legal form of Ben & Jerry’s. The general argument is that “most state legislatures have resisted the tenets of Dodge v. Ford by enacting statutes that expressly authorize corporate directors to look beyond shareholder wealth maximization.” Page and Katz add that in practice, courts are deferential to board decision making, and act in accordance with a doctrine called the business judgment rule, where “unless the directors have a conflict of interest, nearly all board business decisions are beyond judicial review.”

Basically, they argue, if directors put CSR before profit maximization in their considerations, the courts will not interfere as long as there’s a potential benefit to shareholders. “Absent special circumstances, a board’s decision to reject a proposed merger would easily survive a court challenge,” they conclude.

The second argument they make relates to Ben & Jerry’s defense mechanisms that the authors claim could have been used to prevent the sale. These include super-voting stocks, the Ben & Jerry’s Foundation that could block the takeover, and the extreme difficulty to take over the company’s board by an external party. In all, the authors argue, Ben & Jerry’s legal defenses to a forced sale appeared impregnable. So why did the board unanimously agree to sell the company? There could be a number of reasons, they say, but the legal issue wasn’t or at least shouldn’t have been one of them.

Page and Katz are not the first ones to present this approach. Two Harvard Professors, Forest Reinhardt and Robert Stavins, came to a similar conclusion in a 2010 article. After reviewing the legal situation in the U.S., Reinhardt and Stavins ask if firms in the U.S. are prohibited from sacrificing profits in the public interest, and, if so, if the is prohibition enforceable. The answers to these two questions, they write, appear to be ‘maybe’ and ‘no,’ respectively.

“While case law falls short of unequivocally mandating shareholder wealth maximization, it also falls short of unambiguously authorizing the pursuit of non-shareholder interests other than instrumentally for the benefit of the shareholders…And as long as managers claim some plausible connection to future profitability, the business judgment rule grants them substantial leeway to commit corporate resources to projects that benefit the public,” they add.

And it’s interesting to see how the discussion on legalities eventually turns to the question we constantly ask about the business case for sustainability. Namely, is there one when you really are only looking at the bottom line? It can be tough for some companies to make the case – especially if they are only looking at short-term earnings.

The fact that CSR activities which are not immediately profitable are legally protected has far-reaching benefits. It means that explicit corporate forms that protect CSR, such as Benefit Corporation or L3C, while offering other benefits, are not legally necessary for sustainable businesses. This lowers the bar for CSR pursuits in general.

I guess you would still find legal scholars that would argue the opposite and it will also be interesting to see how the courts will address it. Still, it means that we shouldn’t instinctively assume that CSR has no legal merits, even with the old school organizational formats. Did you hear it, Milton?

[Image credit: liltree, Flickr Creative Commons]

Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the New School, teaching courses in green business, sustainable design and new product development.


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  • http://www.facebook.com/microeconomics Chris Macrae

    mathematically the situation is far worse- look at the algorithms actually used for corporate shareholder value and you will find they are corporate speculator value- ie long-term investors (which shoud be most of us if we want pensions etc) are as bigger losers from cases like forcing ben and jerrys to be sold to univever as all the others involved in the productive and demanding value exchnage that ben and jerry could have been about over time

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