My beginner’s understanding of corporate law is that the officers of a publicly traded company are legally obligated to pursue a return for their investors. There seem to be nuances to this idea that I’m not aware of, and maybe someone here can clear the air in a way that will explain the amazing disparity between these two examples:
#1: GM is currently being raked over the coals for their decision not to spent, what, 50-60 cents per vehicle, to install a better ignition lock. Over the course of a few hundred thousand vehicles, this may have saved a few hundred thousand dollars, but lives have been lost as a result, GM will likely lose customers, and they will also likely lose a few lawsuits.
#2: Tesla Motors recently announced that henceforth, the battery packs on all Model S vehicles would be equipped with a new and improved array of titanium an aluminum armor to prevent penetrations by roadway debris. Never mind that this already was the safest vehicle out there, they are spending money to make it even safer. On top of that, they have declared that any owner of a Model S made before this production change could have the new armor fitted to their battery pack at no charge. Surely this costs more than 50-60 cents per vehicle.
So what gives? Does corporate law make a distinction between short-term profits (which GM appears to be pursuing by minimizing immediate costs at the possible expense of long-term losses) and long-term profitability (which Tesla appears to be pursuing by spending money now to ensure that customers don’t ever feel like Tesla is trying to screw them over)?
I have direct factual knowledge of the GM recall, but it has to cost them more than that. The number of vehicles I see is currently 2.6 million. You have to send out multiple letters to all owners about the recall. The postage bill is already in the millions.
Then someone has to perform all those modifications. That is many millions.
Then there is also the fact of lost face. If you are not forced to make the recall, then no one knows about it and then there is no bad PR against GM.
No obligation to make a profit, but an obligation to debt holders, including shareholders. Also, there is an obligation to follow directives from the Board, the members of which are elected by shareholders.
That’s my basic, layman’s understanding of corporate obligation.
The obligation of the corporation is to act in the best interest of the shareholders. So long as the directors exercise that obligation in good faith, courts won’t interfere. It’s called the business judgment rule: essentially, “courts will not interfere in the decisionmaking process of disinterested directors.”
I think the OP was saying that GM had initially saved a few dozen cents on each vehicle when they (it?) chose to use this particular ignition switch design. There’s no denying that the cost of the recall is much higher.
A recall seems inevitable at this point, but I wasn’t even thinking about that. My understanding is that at some point in the past ten years they knew this was a problem but wouldn’t even implement a design change for vehicles yet to be manufactured. here it is:
Should have mentioned: or, when the directors are not disinterested, such as when a transaction will substantially impact their personal wealth and so forth.
Dodge v. Ford Motor Company, 1916. Commonly cited as the case that established that a company’s first priority is the interests of the shareholders. People like employees, customers, and next year’s shareholders are barely worth considering.
That’s not really true; the duty of the company is to the shareholders, meaning that the purpose of the company is to make money for said shareholders.
It’s not an unreasonable idea, considering that the court case came about when Henry Ford was basically trying to turn Ford into a charity of sorts, and thereby wrecking the investments of the shareholders.
This doesn’t mean that the company can’t have other priorities, but it does say that a for-profit company’s goal is that profit for the shareholders.
Look at it this way… let’s say you have your retirement savings, and you put a significant chunk of it into a company that’s done really well over the years, in hopes that your large investment will yield good returns. Let’s say that the CEO goes off his nut and decides to fund a bunch of employee friendly or customer-friendly policies that cause the company to not make money, and what’s worse, drops the value of the company.
Wouldn’t you be pissed? He basically wrecked your retirement in hopes of doing something good for some other nameless people. Your expectation as a shareholder is that the CEO, and by extension the company will do their best to make money for you and either pay you a fat dividend or raise the value of the shares you own, so that eventually you’ll use that profit in your own retirement.
In the Ford case linked above, they also mention the “business judgement rule”
So pretty straight-forward - you have to prove the board made a deliberate, very obvious choice to not maintain profits, if you want to sue them for failing to do so. The default is that however bad a decision might look in hindsight, it can be justified if the intent seems clearly aimed at the goal of profits.
the court does not try to dictae long term vs. short term, or to what extent social conscience plays a role in all this.
IIRC, the case started from some investigator for someone suing the company who discovered the “identical” ignition switch had been modified/re-engineered if you bought a current off-the-shelf replacement. So it seems they corrected their error, they just did not feel a recall was justified.
Certainly, the complete life cycle of a recall is a lot more than 67 cents per vehicle, once you figure in mailing, distribution of the parts, labour of removing the old and installing the new switch, etc.). Perhaps the logic was that a car turning itself off is not that bad an incident and would not result in increased liability. That’s a business judgement call that is up to the company to make. Whether it’s the “right” one is entirely subjective.
(I’ve driven with a failed steering pump several times, and with no assist on the brakes. I could see it being difficult, but I can see their point of view that it may be less serious than cars that burst into flame or take of at full speed… Although I don’t think I’d want to have a sudden power failure in the middle of an expressway no matter if my steering still worked easily or not…)
I agree, but I believe the SCOTUS has dimmed that view of priorities somewhat in light of recent rulings on campaign finance (Citizens United). Re: if a corporation’s priorities are to the shareholders, wouldn’t the shareholders interests regarding political contributions be an issue?
Even if the cost really is only .50 without any additional costs, let's remember that this happens in the context of a car that has *thousands *of components. If you add up enough .50 increases on individual components, pretty soon you’re looking at hundreds of dollars per car.
I’m sure every single $.50 increase has a very similar argument, too. So if they’re right 99% of the time in similar situations, it’s not reasonable to me to claim that they were not acting in the best interest of the shareholders. The law only compels you to be reasonable/diligent, not perfect.