The 'Long Term' in Corporate Law

Abstract

To read influential corporate lawyers, legal academics, and jurists, shareholders are an alarmingly myopic bunch who demand that corporate directors and managers make short-term decisions that sacrifice long-term value. But here is the mystery: there is virtually no evidence that shareholders prefer short-term gains that are smaller than larger (discounted) long-term gains.

I make a simple claim in this Essay: the short term/long term rhetoric in Delaware corporate law masks the real battle, one between a rational desire by clear-sighted shareholders for shareholder value maximization, on the one hand, and a desire by courts and others for corporate longevity – i.e., long-term corporate survival – on the other. Corporate law directs, or at least allows, directors to manage for long-term survival, i.e., a state of sufficient ongoing profitability that allows the corporation to exist for as long as possible, regardless whether or not that level of profitability is value-maximizing for shareholders.

The problem this raises is obvious: if Delaware allows corporations to prioritize longevity, then that is a goal often at odds with what shareholders want. Whether this policy is good or bad for society, I leave for another day. But so long as Delaware leaves the power of the vote with shareholders while giving directors a hidden power to act against their interests in the name of corporate longevity, we can expect shareholder objections and activist efforts in many cases where corporations are worth more in different form, whether differently oriented, smaller, acquired and merged into larger organizations, or, to put it harshly, liquidated and dead altogether.

Keywords: Corporate Law, Corporate Governance, Shareholder Activism, Myopia

JEL Classification: G31, G38, K22