Class actions use and profit maximisation

1. In many jurisdictions, the use of corporate class actions to discipline management for violations of fiduciary duties and breaches of good faith is curtailed. What are the benefits of limiting the use of class actions in this context? What are the costs? Please define the fiduciary duties of corporate managers in your answer.

Today, more companies are not managed by their shareholders. Generally, the management of the company is overseen by a board of directors elected by the shareholders. The management team has to make decisions for the firm while the board is responsible to take care of shareholders’ best interests. This chain of command creates fiduciary duties of corporate managers which are their obligation to act in the best interest of shareholders. There are two duties of loyalty established: fiduciary duty of loyalty consisting for a director to respect the arm’s length principle, not usurp corporate opportunities for themselves and respect the confidentiality, and fiduciary duty of care consisting for a director to make decisions in good faith and in a reasonably prudent manner.

On one hand, according to this definition, there are some benefits for management arising from the limitation of the use of class actions. First, as good and bad faith is a flexible standard from different points of view, it can create more confidence for management to take decisions without the fear of being accused. It can undertake more projects and have a more long-term approach. Then, the management is more focused on growing the company than in being distracted by a lawsuit as this kind of litigation can be very time-consuming. Last, to settle class action lawsuits, the firm has to pay money which lowers the value of the company and also the value of shares.

        On the other hand, there are also some costs for the shareholders arising from this limitation. If the management team is overconfident, it can lead to poor investment and bad decisions which can be very costly for a company. Then, to protect their business, firms are often insured against some risks so in case of litigation it would be the insurance company that would have to pay money. Last, if someone is irresponsible and gets to be director, it would be more difficult for shareholders to prove that this person is not doing its best serving the company.

2. For many decades, the firm was understood as an organizational unit focused exclusively on profit maximization. In recent years, corporate social responsibility has gained increasing importance. Can corporate social responsibility be seen as a powerful marketing tool, simply aimed at profit maximization, or does it represent something else?

Corporate Social Responsibility (CSR) is at the centre of the strategy of more and more companies. As it directly impacts the brand image, one can wonder if this a smokescreen implemented with the sole purpose of profit maximization or if companies really want to impact the world positively.

At a time when sustainable development is a key concept of growth, CSR is seen as a way for companies to pursue this idea. Some companies have achieved to become major players in their sector by promoting their business as more ethic and more environmentally friendly. To embrace the trend is a thing, but to build a business only around this purpose is another. In this situation, it can be seen as a marketing tool aimed directly at customers with the only idea of making profit because the company would not have succeeded if it was not for this. Furthermore, if companies would really want to have a meaningful impact on their environment, they could simply be non-profit organization or give the profit back.

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