The Right Coast

February 09, 2006
Corporate social responsibility and reply to Bainbridge
By Tom Smith

Steve challenges me to 'operationalize' my claim that corporations no more than individuals can excuse immoral behavior by pointing to their duty or preference for maximizing somebody's (such as shareholders') wealth.

This can get tricky, because it depends on what you mean by 'operationalize' and what it means for shareholder wealth maximization to be a 'norm.' I tend to think the degree to which shareholder wealth maximization really is a norm, let alone a legal rule, is exaggerated. It is difficult to get into legal, as opposed to market, trouble for not maximizing shareholder value, the Ford and Dodge Bros. case being a rare counter-example. So, one has to construct a rather unrealistic hypothetical to tee up the question, but that is part of what law professors get paid for, so here goes.

Suppose you are the President or some other high officer of Hilton Hotels. You have a big hotel in Bangkok. It comes to your attention that a large tour group that operates out of, let's say, Japan, books large blocks of rooms in your hotel as part of its "sex tourist" business. That is, this tour group promotes and offers vacation packages to Japanese men who want to come to Bangkok and take advantage of the brothels there which specialize in child prostitutes. (I understand this is a big business, though I am making up the part about a tour company offering these trips explicitly in Tokyo, though it would not surprize me.) Further, let's say Hilton makes a lot of money on this trade. Now, let's say the Hilton executive decides the company just should not be involved in this business, because child prostitution is immoral. It amounts to little better than slavery in the best case, and is frankly slavery in the worst. Child prostitutes are ill treated, and usually get sick, die and are tossed away like soiled tissues. A dreadful business. So, Hilton executives decide they are just not going to do business anymore with that tour company, even though it is going to cost Hilton a lot of money to make this decision.

I would say, of course they can and should make that decision. And no shareholder should be in a position to make them do otherwise. Nor do I think any would be under current law. That is, I predict no judge would rule that Hilton officers had violated any duty they have to the corporation and its shareholders by making that decision, for moral reasons. Granted, it is likely the case would not even come up, because all the officers would have to say to avoid any question of violation of duty, would be to say, in their business judgment, the long term economic interests of the firm were not served by being involved in the child prostitution business. Business judgment rule to the rescue. But I think even if the Hilton officers for some reason said, we are not making the decision on economic grounds -- we just think as a moral matter, this company should not be involved in child prostitution, they would still win the case. Thinking this would not be the result is placing way too much faith in the persuasive and precedential power of the Dodge Bros. case. Good luck finding a judge that would tell Hilton they cannot do as I hypothesize they did. As a fallback, I would say, Hilton ought to win the case.

If executives were permitted to do this, does this mean that sometimes they would claim to have moral qualms about doing something that they really objected to for some other self-serving reason? Sure. But I think competitive markets serve as an adequate check against that sort to thing. If executives have qualms about not worshipping the golf gods at least twice a week, I think labor and capital markets will take care of them. And indeed, these markets may even force Hilton back into the child prostitution business, and laws may have to be passed to stop them (and may already have been, for all I know).

And then there is this . . .

Thai village a sex-trade hub as families sell off daughters
By Andrew Perrin

MAE SAI, Thailand - Ngun Chai sold his 13-year-old daughter into
prostitution for the price of a television set. He had no regrets. His
wife, Lu, had one. When she discovered that her eldest daughter wasn't
working in a bar in a nearby city - as the agent who bought the girl had
promised - but was selling her body in a Bangkok brothel to as many as
eight men a day, she wept. The tears were not for her daughter.

"I should have asked for 10,000 baht [$228], not 5,000," she said. "He
robbed us."