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Comment by sdurkin | Hacker News Reader

Little story about Henry Ford. Every grade school American History textbook mentions how Mr. Ford raised the wages of his factory workers above market value, so they could afford to buy the cars they produced. Little known fact: Ford was then sued by the shareholders for breach of fiduciary responsibility. He lost.

Google is a publicly traded company. Its CEO and board are bound by law to seek the greatest returns possible for shareholders. If they don't seek the highest returns, they can be sued. They have decided that it is no longer in the monetary interest of Google to subsidize legal costs for an entire industry.

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I find it interesting that many believe a company's "CEO and board are bound by law to seek the greatest returns possible for shareholders" is actual law. Is it? What is this law? Companies are state entities, not federal ones. So the only federal law would be SEC stuff, right? I find it hard to believe that all 50 states have the same law.

IANAL, I would appreciate someone pointing me the law or court decisions that have made this to be.

Two relevant Wikipedia links:

http://en.wikipedia.org/wiki/Fiduciary http://en.wikipedia.org/wiki/Board_of_directors

Summary of fiduciary duty as I understand it (IANAL):

An agent has a responsibility to act in his or her client's best interest. An example is a trust, which is obligated to act in the financial best interests of the beneficiary. I believe a lawyer's duty to the client and a doctor's duty to the patient are similar. In the case of a board of directors, they have a legal responsibility to act in the best interest of the shareholders.

How would such a trial proceed, though? Would the judges then have to decide what course of action would have been the best for the company? And how could they ever prove that their opinions are correct? How could they prove that raising the wages would not benefit Ford in the long run?

So in effect one could buy really cheap managers who screw up and then sue them. Then one could get the "expertise" of the law courts for free to decide on the best action for a company.

About Henry Ford: Could you provide a citation for this? I'm not doubting you, but it's a really interesting point, and I'd like to dig deeper. (If not, I'll search the next time I have a chance...)

Sure. I'm getting it from Jared Diamond's book Collapse:

http://books.google.com/books?id=QyzHKSCYSmsC&pg=RA1-PA4...

Probably a good idea to check his source, but I can't find my hard copy at the moment.

Thanks!

Interesting. Can you use this same reasoning (bound by law to maximize shareholder value) to sue corporations for not operating in developing countries where they can take advantage of lower wages, cheaper labor, no unions, etc? Think GM or something.

That's a little different because a company could argue that moving operations offshore would hurt sales. If a company was already operating offshore, and they turned down an offer to move to another, cheaper location, then you'd probably have a case.

Doesn't this apply less to Google because of the way in which they went public?

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