University of Chicago Business Law Review
A compelling point in The Economic Structure of Corporate Law is that the single goal of maximizing shareholder value is efficient and generally desirable because it gives the managers one aim—while leaving room for law and private contracts to impose constraints on the firm in order to control negative externalities and other social concerns. Easterbrook and Fischel say that: “A manager told to serve two masters (a little for the equity holder, a little for the community) has been freed of both and is answerable to neither.” The point is an especially good one when the manager has more of an interest in one master’s success than another’s, and this is the point that Easterbrook-Fischel emphasize. But it is also the case that the single goal of value maximization, encapsulated in share price in an efficient market, allows investors to monitor managers, not so much to look for misbehavior and the prospect of a lawsuit, but to decide whether to invest in one enterprise or another. In this Article, I ask what this brilliant insight tells us about not-for-profit (NFP) entities which do not offer “investors” (donors) or the law a single metric in order to evaluate their performance. Should investors, and the “market,” prefer an NFP with a single goal or cause, like the environment, however hard it is to measure progress towards this goal, or should we expect the market—as we might think of the competition for donor dollars—to evaluate performance through some alternative mechanism, spread perhaps across a diversified portfolio inside the “firm,” including a university or foundation? Falling in between these two types of opportunities for investment are self-proclaimed ESG (Environment, Social, and Governance) sensitive corporations. These firms attract investors not only by earning profits and increasing shareholder wealth but also by adding to shareholder welfare with a promise to undertake causes, like environmental sensitivity, that appeal to shareholders who invest in these ESG-sensitive enterprises. Easterbrook-Fischel might be expected to disparage the development of ESGs, because they intentionally depart from the single-goal advantage of conventional corporations. On the other hand, if some shareholders want not only to profit but also to pursue various social goals, a corporation can appeal to these shareholders, even if their actual behavior is difficult to assess. Not-for-profits are at the other end of the spectrum. They suffer from many of the same problems. Investors have difficulty knowing whether an NFP is doing a good job. One strategy, developed in this Article, is to follow the advice of donors who have some incentive to evaluate the NFP and compare it with other organizations that would be happy to take their gifts. This explains the ability of an NFP like Harvard (the best endowed university) to receive support from private donors, foundations, and the government. It might seem like a successful NFP does not “need” the money as much as other, less well-endowed NFPs but, on the other hand, its ability to attract large gifts might inform new donors that it is a good investment, just as the share price of a conventional corporate firm, or a takeover offer from a sophisticated company, offers useful information. It also explains the tendency of NFPs to attract large gifts directed at specific goals. If donor Y sees that donor X gave $100 million to an NFP to investigate a particular disease, donor Y might give that NFP a gift because Y shares an interest in that cause, and now wants the recipient to do yet more. Another potential donor, with a different goal in mind, might also learn from X’s gift, and reason that the favored NFP is well-managed and reliable. Just as Easterbrook-Fischel explained the advantage of a corporation’s obligation to follow a single goal, an NFP can be understood as aiming to show that it follows the single goal of reliability, and especially its ability to keep a promise about a single goal as expressed by the investor, or donor. ESGs are unlikely to offer a comparable message because it will not be clear to Y, or another investor, what to learn from a large investment in an ESG corporation.
Saul Levmore, "Not-for-Profits, ESGs, and The Economic Structure of Corporate Law," 1 The University of Chicago Business Law Review 339 (2022).