Springtime is the season when most American corporations hold their annual meeting of shareholders. In the course of a typical meeting, board directors will be elected and independent auditors will be appointed. Management will report on operating results and earnings for the fiscal year recently ended, and will outline their strategic business plans for the future. In their presentations, management will make the case that they are fulfilling the fundamental fiduciary duty they have to promote the best interests of the corporation and maximize shareholder value.
Annual meetings routinely include management reports on particular regulatory issues that currently confront the corporation and management’s plans to deal with those issues. Typically absent from such reports is any description of a plan to deal more fundamentally with the underlying dysfunctional contra-constitutional regulatory system that produces the countless particular regulatory issues that corporations must deal with. Typically absent from management reports is any description of a plan to restore the rule of law. This is a serious omission from the meeting’s agenda because management’s fiduciary duty includes an obligation to work to restore the rule of law.
Shareholder value, the value of a corporation to its shareholder owners, is revealed in the market value of the company’s equity, the economic value that market investors place on the company’s common stock, the price they are willing to pay to become owners of the corporation.
The market value of a company’s common stock represents the value that investors place currently on the right to own the company and its future earnings. The market value of a company’s common stock represents the assessment investors have made about the company’s future economic prospects.
It’s very difficult, of course, for investors to estimate the future earnings of a company. There is a lot of uncertainty. Many factors can affect future earnings for better or worse. Factors that decrease the uncertainty about future earnings will raise the current market value of a company’s stock. Conversely, factors that increase the uncertainty about future earnings will suppress the current market value of a company’s stock. As the old saying goes, the markets hate uncertainty.
Economic uncertainty, therefore, decreases shareholder value. Management’s fiduciary duty to maximize shareholder value obligates management to do everything they can to mitigate factors that contribute to economic uncertainty.
Many economists have noted the significant economic benefits that flow from a system of governance based on the rule of law, a system of fixed rules clearly written and enacted with the consent of the governed for general application prospectively. Such a system restrains the arbitrary unpredictable exercise of power. Such rules make it possible to foresee with fair certainty how power will be applied in given circumstances and, within the open spaces established by such rules, to freely plan one’s own affairs. Such rules encourage individuals, and corporations, to undertake the risks and pursue the rewards associated with productive economic activity and innovation because they know that policymakers will be prevented from arbitrarily disrupting their arrangements. Such a system of rules, by increasing certainty, helps corporate management to maximize shareholder value.
The Founders, through the Constitution, established a government of limited authority granted by a sovereign people, its enumerated powers checked and balanced by a clear separation of functions, all to protect against the arbitrary exercise of power and to secure the inalienable rights of the people so forcefully affirmed in the Declaration of Independence. And through the Constitution and its structural restraints on the exercise of arbitrary power, the Founders established a system of governance based upon the rule of law.
As a result of its commitment to the rule of law, America enjoyed unparalleled progress and prosperity. However, as the 20th century unfolded, the so-called progressives began to question the principles and institutions of our founding. They worked to replace our constitutional system of government with a “new republic” led by an unrestrained executive bureaucracy freely wielding consolidated power to manage every aspect of American life. The progressives asserted that experts were needed to manage things in modern America because ordinary citizens simply could not be expected to keep up. These supposedly disinterested experts, schooled in the social sciences and public administration, left free to exercise their professional discretion on a case-by-case basis, were to manage the new republic by permitting and prohibiting, rewarding and punishing, and allocating and reallocating the resources of society. Thus, the progressives replaced the rule of law with the rule of the regulator.
Much of what is concerning about the current regulatory system — the consolidation of once separate government functions within a largely unaccountable “fourth branch,” the constantly changing rules, the rules written to pick particular winners and losers, the endless maze of permitting, the politicized enforcement and shakedown settlements, the retroactivity, the waivers, the abiding uncertainty that results from the broadly defined discretionary authority of individual regulators — all of these problems that create an uncertain business environment for individuals and corporations are directly traceable to the degradation of our constitutional system. The essence of the rule of law is the restraint of arbitrary power and certainty; the essence of the current regulatory system is the exercise of arbitrary power and uncertainty.
Much has been written about how corporations, especially large corporations, use the regulatory process to protect and advance their economic interests at the expense of their competitors and potential new market entrants. Corporate managers will understandably be reluctant to forego any available competitive advantage, even an advantage gained from the workings of the current regulatory system. After all, managers are under relentless pressure to maximize shareholder value.
That said, financial analysis and the historical record strongly supports the conclusion that the most effective way for management to promote the best interests of their corporation and maximize shareholder value over the long term is by working to fundamentally reform the regulatory system and restore the rule of law, the system of governance that best supports productive economic activity. Indeed, management has a fiduciary duty to do so.
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J. Kennerly Davis is a former Deputy Attorney General for Virginia, a retired corporate executive, and currently is a contributor to the Regulatory Transparency Project.