I. WHAT DO BUSINESSES DO AND WHAT DO LAWYERS FOR BUSINESSES DO? (2/6/07)
A. Why does someone own a business or an interest in a business?
1. The Epstein-Freer View and the Roberts View:
a. People own businesses to make a profit
b. A business is also some form of activity that is organized to “create value” for its owners
i. A business can make money without creating value
ii. A business can create value without making money
c. {People may also own businesses w/others in order to spread the risk of failure}
2. Views of other “Gontser Machers” –Big Shots
a. Milton Friedman’s View/ Agency Principles/ CONTRACTARIAN Theory:
i. Friedman says that the primary purpose of the corporation is to make a profit.
ii. AGENT
1. CEO = agent of the shareholders.
2. Agent is synonymous with EMPLOYEE
iii. PRINCIPAL
1. SHAREHOLDER = principal
2. Principal is synonymous with EMPLOYER
3. PRINCIPAL = THE BOSSMAN!!!
iv. Important POINTS to remember:
1. An agent has MORE independence than an employee because a principal has LESS control over an agent than an employer has over his employee.
2. An independent contractor may not be an agent because he services others but may not be controlled by the person he services. The house owner tells him that she wants a bathroom but she won’t tell him how to build it.
3. On the other hand, a store manager can tell an employee exactly how to do his job!
4. Therefore, there is a continuum of control…
5. Employer/Employee relationship is a subcategory of agency relationship. But don’t always assume that an agent/principal relationship is employee/employer (it can be an independent contractor).
6. Master/Servant relationship is a subcategory of agency relationship
7. Under the contract theory, the corporation is NOT a separate entity.
8. For Friedman, a corporation is a series of contracts coming together. And the central contract at work is between the shareholders and the management. In this theory, the shareholders are thus the principle and the executive officer is thus the agent. The principals are hiring the agent to make money for them! This is Friedman’s focus.
9. PROBLEMS: Purpose of a Business(book p4):
a) Would Friedman agree w/Ben & Jerry’s mission statement of giving to charities? NO!!! Friedman would NOT agree with Ben & Jerry’s charitable gifts because he would argue it is a corporate waste not to invest is profitable companies because of moral aversion.
10. Criticism of Friedman: he doesn’t account for the fact that social responsibility may be the wish of the shareholders—that they may be acting as the agents, not the principals!
b. ENTITY Theory:
i. The problem with Friedman’s theory is that a CEO can be a shareholder!…
ii. CEO = ag
nsiderations, statute correctly applied.
1. The fundamental purpose of a corporation is to make money. The board and management team should have discretion as to how this is to be done. Charitable gifts help the corporation in a number of ways.
2. The corporation is being a good citizen of NJ by donating to a university.
3. The corporation has historically been viewed as an entity designed to improve public welfare.
4. Contributing to universities aids democracies and the social ordering in this country and is thus a worthy cause.
5. This is a modest amount of money p10
6. Pet Charity: the corporation was NOT giving to a pet charity. Giving to a pet charity, according to Friedman, would be like acting as a principal for oneself. This would be a bad thing b/c it would be self-serving—not in the interest of the corporation. p10
vi. CENTRAL THEME/ RULE: management can engage in activity that at least some of the shareholders disagree with.Court says corporations may do something that isn’t directly beneficial. In terms of black letter law, court says:
1. must be some benefit to corporation
2. no pet charities
