Milton Friedman's Business Ethics
66 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What was the title of Milton Friedman's 1970 article that criticized businesses for attempting to promote desirable social ends?

A Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits

What is the primary responsibility of companies, according to Milton Friedman?

To its shareholders

What 1976 paper provided a quantitative economic rationale for maximizing shareholder value?

Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure by Michael C. Jensen and William Meckling

Who argued that Milton Friedman is not to blame for the rise of shareholder primacy in American corporations?

<p>Prof. Cheffins</p> Signup and view all the answers

What is the name of the professor who wrote a paper defending Milton Friedman's views on corporate social responsibility?

<p>None (Prof. Cheffins actually argued against Friedman's influence)</p> Signup and view all the answers

What is the term used to describe the prioritization of shareholder interests in corporate decision-making?

<p>Shareholder primacy</p> Signup and view all the answers

What is the primary reason why shareholders prefer higher return projects, despite the associated risks?

<p>Because risk and return are positively correlated, and shareholders have a high tolerance for risk due to the doctrine of limited liability and the ability to eliminate firm-specific risk through diversification.</p> Signup and view all the answers

Why do managers tend to be more risk-averse than shareholders?

<p>Because they may suffer greater losses, such as losing their jobs, if a risky decision fails to pay off, and they may face legal liability for their decisions.</p> Signup and view all the answers

What is the 'hindsight bias' in the context of business decision-making, and how can it affect judicial outcomes?

<p>The tendency to assign an erroneously high probability of occurrence to a probabilistic event simply because it ended up occurring, which can lead judges to find a breach of duty of care in hindsight.</p> Signup and view all the answers

How do shareholders' interests differ from those of managers in terms of risk tolerance?

<p>Shareholders have a high tolerance for risk due to limited liability and diversification, whereas managers are more risk-averse due to potential personal losses and legal liability.</p> Signup and view all the answers

What is the primary function of the doctrine of limited liability in the context of corporate risk-taking?

<p>It insulates shareholders from the downside risks of corporate activity, allowing them to take on riskier investments.</p> Signup and view all the answers

How does portfolio theory relate to shareholders' risk tolerance in the context of corporate decision-making?

<p>It teaches that shareholders can eliminate firm-specific risk by holding a diversified portfolio, making them more willing to take on riskier investments.</p> Signup and view all the answers

What is the significance of the Corwin test in the standard of review for corporate transactions?

<p>The Corwin test applies the business judgment rule whenever the transaction is approved by a fully informed, uncoerced vote of disinterested stockholders, shifting the standard of review from Revlon to BJR.</p> Signup and view all the answers

What is the 'cleansing effect' in the context of the Corwin doctrine?

<p>The 'cleansing effect' refers to the shift in the standard of review from Revlon to BJR when the transaction is approved by a fully informed, uncoerced vote of disinterested stockholders.</p> Signup and view all the answers

How can a plaintiff overcome the 'cleansing effect' in a Corwin doctrine case?

<p>A plaintiff can overcome the 'cleansing effect' by showing that the shareholders' vote was not fully informed.</p> Signup and view all the answers

What is the significance of material misrepresentations or omissions in the disclosures provided in connection with the shareholder vote?

<p>If there are material misrepresentations or omissions in the disclosures, the vote will not extinguish care claims.</p> Signup and view all the answers

What is the relationship between the Corwin test and the Revlon standard of review?

<p>The Corwin test applies the business judgment rule, shifting the standard of review from Revlon to BJR, when the transaction is approved by a fully informed, uncoerced vote of disinterested stockholders.</p> Signup and view all the answers

What is the significance of the cases in which the Corwin doctrine failed?

<p>Most cases where the Corwin doctrine failed were cases in which full information was lacking.</p> Signup and view all the answers

Under the statute, what is the burden of proof for defendant directors seeking exculpation?

<p>Defendant directors have the burden of proving that they are entitled to exculpation.</p> Signup and view all the answers

What is the consequence of aggressively applying the Emerald ruling to §102(b)(7) provisions?

<p>A discovery would occur first, with all the consequences in terms of costs and settlement.</p> Signup and view all the answers

When can Chancery Court grant §102(b)(7) motions to dismiss?

<p>When a plaintiff merely alleges the breach of the DoC and the defendant objects on grounds of a raincoat provision.</p> Signup and view all the answers

How can plaintiffs end-run §102(b)(7) provisions?

<p>By characterizing/coloring their claim as a duty of loyalty violation.</p> Signup and view all the answers

What must plaintiffs plead in order to proceed with a claim against an independent director protected by an exculpatory charter provision?

<p>A non-exculpated claim for breach of fiduciary duty.</p> Signup and view all the answers

Under what standard is a claim subject to review in certain cases?

<p>The entire fairness standard.</p> Signup and view all the answers

What is the underlying purpose of the duty of care and duty of loyalty, and to whom are these duties owed?

<p>The underlying purpose of the duty of care and duty of loyalty is to act in the best interest of the corporation, and these duties are owed exclusively to shareholders.</p> Signup and view all the answers

What is the term used to describe the doctrine that prioritizes the interest of shareholders in corporate decision-making?

<p>The term used to describe this doctrine is the Shareholder Value Doctrine.</p> Signup and view all the answers

What is the significance of the shift in the balance of power between managers and shareholders in the 1980s, and how did it impact corporate governance?

<p>The shift in the balance of power between managers and shareholders in the 1980s led to the rise of the Shareholder Value Doctrine, as shareholders gained more influence over corporate decision-making.</p> Signup and view all the answers

What is the difference between standards of conduct and standards of judicial review in corporate governance?

<p>Standards of conduct refer to the rules outlining norms and responsibilities of an individual party, such as the duty of care and duty of loyalty, whereas standards of judicial review are tests that a court applies to scrutinize a business decision.</p> Signup and view all the answers

How do the duties of care and loyalty relate to the best interest of the corporation, and what is the ultimate goal of corporate actions?

<p>The duties of care and loyalty require directors to act in the best interest of the corporation, and the ultimate goal of corporate actions is to maximize shareholder wealth.</p> Signup and view all the answers

What is the significance of the Shareholder Value Doctrine in the context of corporate governance, and how has it evolved over time?

<p>The Shareholder Value Doctrine has had a profound impact on corporate governance, prioritizing shareholder wealth maximization as the primary goal of corporate actions, and has evolved over time through the influence of economic studies and shifting power dynamics.</p> Signup and view all the answers

What is the standard of review that applies in Delaware law, and what are the key elements that need to be shown in DoC cases?

<p>Gross negligence is the standard of review that applies in Delaware law, and the key elements that need to be shown in DoC cases are causation and damages.</p> Signup and view all the answers

What is the effect of reliance on officers in lawsuits, and how does it relate to the duty of care?

<p>Directors will be fully protected if they relied in good faith upon information/reports provided from officers, and this relates to the duty of care as it requires directors to pay on-going attention to the business and affairs of a corporation.</p> Signup and view all the answers

What is the significance of Francis v. United Jersey Banks (N.J. 1981) in the context of corporate law, and how does it relate to Oversight Liability?

<p>Francis v. United Jersey Banks (N.J. 1981) is a precursor to Oversight Liability, which requires directors to pay on-going attention to the business and affairs of a corporation.</p> Signup and view all the answers

What is the effect of stockholder ratification on the business judgment rule, and what is the significance of the Corwin test?

<p>Stockholder ratification can cleanse the transaction and secure it with the protection of the business judgment rule, and the Corwin test is used to determine when the business judgment rule applies.</p> Signup and view all the answers

What is the relationship between the duty of care and the duty of loyalty, and to whom are these duties owed?

<p>The duty of care and the duty of loyalty are related in that they are both owed to the corporation, and the duty of care requires directors to pay on-going attention to the business and affairs of the corporation, while the duty of loyalty requires directors to act in the best interests of the corporation.</p> Signup and view all the answers

What is the significance of the Delaware corporate law in the context of corporate governance, and how does it impact the fiduciary duties of directors and officers?

<p>Delaware corporate law is a leading authority on corporate governance, and it has a significant impact on the fiduciary duties of directors and officers, particularly in the areas of duty of care and duty of loyalty.</p> Signup and view all the answers

In a Delaware M&A transaction, what are the conditions under which the standard of review shifts from entire fairness to business judgment, and what are the implications for controlling stockholders?

<p>The standard of review shifts to business judgment if both a properly functioning special committee and approval of a majority of the minority are present. This means that the controlling stockholder receives more deference from the court, and the burden of proof shifts to the plaintiff.</p> Signup and view all the answers

What is the significance of a properly functioning special committee in Delaware M&A transactions, and how does it impact the standard of review?

<p>A properly functioning special committee shifts the burden of proof to the plaintiff, potentially allowing for a business judgment standard of review, which is more deferential to the board's decisions.</p> Signup and view all the answers

In Delaware corporate law, what is the significance of approval by a majority of the minority shareholders, and how does it impact the standard of review?

<p>Approval by a majority of the minority shareholders can shift the burden of proof to the plaintiff, potentially allowing for a business judgment standard of review, which is more deferential to the board's decisions.</p> Signup and view all the answers

What is the significance of the controlling stockholder's independence and disinterest in Delaware M&A transactions, and how does it impact the standard of review?

<p>If the controlling stockholder is not independent and disinterested, the standard of review is entire fairness, which is more scrutinizing. If the controlling stockholder is independent and disinterested, the standard of review may shift to business judgment.</p> Signup and view all the answers

In Delaware corporate law, what is the significance of the entire fairness standard of review, and when is it applied?

<p>The entire fairness standard of review is the most stringent standard, applied when no special committee or minority shareholder approval is present, or when the controlling stockholder is not independent and disinterested.</p> Signup and view all the answers

What is the significance of the business judgment standard of review in Delaware corporate law, and when is it applied?

<p>The business judgment standard of review is the most deferential standard, applied when a properly functioning special committee and minority shareholder approval are present, allowing for more deference to the board's decisions.</p> Signup and view all the answers

In a transaction involving a controlling stockholder, what is the standard of review if the majority of the board is not independent and disinterested, but there is a properly functioning special committee or approval of a majority of the minority?

<p>Entire fairness, but the burden of proof shifts to the plaintiff.</p> Signup and view all the answers

Under what circumstances will the business judgment rule apply in a transaction involving a controlling stockholder?

<p>If both a properly functioning special committee and approval of a majority of the minority are present.</p> Signup and view all the answers

What is the standard of review in a transaction involving a controlling stockholder if the majority of the board is independent and disinterested with respect to the controlling stockholder?

<p>Business judgment</p> Signup and view all the answers

What is the significance of the Corwin test in the context of Delaware corporate law?

<p>It determines the standard of review for corporate transactions.</p> Signup and view all the answers

What is the relationship between the Corwin test and the Revlon standard of review?

<p>The Corwin test is related to the Revlon standard of review in certain cases.</p> Signup and view all the answers

What is the significance of material misrepresentations or omissions in the disclosures provided in connection with the shareholder vote?

<p>They can affect the application of the Corwin test and the standard of review.</p> Signup and view all the answers

Who is responsible for making a determination regarding indemnification of a director or officer in a corporation?

<p>A committee of directors designated by majority vote</p> Signup and view all the answers

What is the primary purpose of indemnification under §145(a) of the Delaware corporate law?

<p>To indemnify directors and officers for liabilities arising by reason of their position</p> Signup and view all the answers

What is the significance of the SEC's position on indemnification against liability under the federal securities laws?

<p>It is against public policy</p> Signup and view all the answers

What is the primary distinction between direct suits and derivative suits under §145(a) of the Delaware corporate law?

<p>Direct suits are for liabilities arising by reason of the person's position, while derivative suits are for fiduciary breaches</p> Signup and view all the answers

What is the primary responsibility of a committee of directors designated by majority vote in the context of indemnification?

<p>To make a determination regarding indemnification of a director or officer</p> Signup and view all the answers

What is the significance of the majority vote of the directors in the context of indemnification?

<p>It is required to make a determination regarding indemnification of a director or officer</p> Signup and view all the answers

According to §8.30(a), what is a requirement for a director to act in good faith?

<p>The director must reasonably believe the action to be in the corporation's best interest</p> Signup and view all the answers

What is the purpose of the Business Judgment Rule (BJR)?

<p>To create a less demanding standard of review for directors' conduct</p> Signup and view all the answers

Under MBCA §8.30, what is a consequence of a director's conduct satisfying the requirements?

<p>The director is protected from liability for corporate decisions</p> Signup and view all the answers

What is a circumstance under which director liability can be imposed according to MBCA §8.31?

<p>The director was not properly informed or was not independent</p> Signup and view all the answers

What is the function of the Business Judgment Rule (BJR) in corporate law?

<p>To set forth the tests that courts will use in determining whether directors' conduct can be scrutinized and gives rise to liability</p> Signup and view all the answers

What is the significance of the post-Van Gorkom era in corporate law?

<p>It led to an increase in director liability</p> Signup and view all the answers

What is the primary purpose of MBCA §2.02(b)(4) and similar statutes in other states?

<p>To limit the liability of directors and officers for breaches of their fiduciary duties</p> Signup and view all the answers

What is the significance of the Arnold v. Society for Savings Bancorp (Del. 1994) case?

<p>It held that an exculpatory §102(b)(7) provision applies only to actions taken solely in the capacity of a director</p> Signup and view all the answers

What is the effect of the 2022 amendment to DGCL on officer exculpations from breaches of the fiduciary duty of care?

<p>It allowed Delaware corporations to adopt charter provisions exculpating officers from breaches of the fiduciary duty of care</p> Signup and view all the answers

What is the primary purpose of statutory responses to corporate crises, such as MBCA §2.02(b)(4) and similar statutes in other states?

<p>To limit the liability of directors and officers for breaches of their fiduciary duties</p> Signup and view all the answers

What is the significance of the Van Gorkom case in the context of corporate law?

<p>It led to statutory responses to corporate crises, such as MBCA §2.02(b)(4) and similar statutes in other states</p> Signup and view all the answers

What is the primary purpose of charter provisions exculpating directors and officers from breaches of their fiduciary duties?

<p>To limit the liability of directors and officers for breaches of their fiduciary duties</p> Signup and view all the answers

Study Notes

The Evolution of the Doctrine

  • Marked two important milestones: Corwin (2015) and MFW (2014)
  • Corwin established the Corwin test: business judgment rule applies if transaction is approved by fully informed, uncoerced vote of disinterested stockholders
  • Corwin test has a "cleansing effect," shifting the standard of review from Revlon to business judgment rule
  • Plaintiff can overcome the cleansing effect by showing shareholders' vote was not fully informed

Why a Business Judgment Rule?

  • Shareholders, as residual claimants, prefer higher return projects, but are insulated from downside risks by limited liability
  • Managers are risk-averse due to potential job loss and legal liability
  • Hindsight bias can occur when judges evaluate business decisions with the benefit of hindsight

The Shareholder Value Doctrine

  • Companies have no social responsibility to the public or society, only to shareholders
  • Influential articles by Milton Friedman (1970) and Michael C. Jensen and William Meckling (1976) promoted shareholder value maximization
  • The doctrine took hold in the 1980s due to a shift in the balance of power between managers and shareholders

Directors' Fiduciary Duties

  • Directors owe duties exclusively to shareholders
  • The duty of care requires acting with the care of an ordinarily prudent person
  • The duty of loyalty requires acting in the best interest of the corporation

Takeaways

  • Directors' duties are owed exclusively to shareholders
  • Standards of conduct differ from standards of judicial review
  • The shareholder value doctrine implies that the purpose of corporate actions must be shareholder wealth maximization

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Matera LUISS Course Packet Section 7 PDF

Description

Learn about Milton Friedman's views on business ethics and corporate social responsibility, as expressed in his 1970 New York Times article. Quiz yourself on the economist's stance on the role of private enterprises in society.

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser