Several assumptions from traditional economic theory and law seemingly hinder MRI.  However, the premises underlying these assumptions are not on as solid footing as once perceived.  Some of these assumptions include A) the decreased profitability of MRI, B) the legal doctrine that a director’s sole responsibility is to maximize profits and C) the gap between ownership and control in the public corporation cannot be closed. 

Assumption A.  Traditional economic theory assumes that MRI is less profitable than traditional instruments because profit maximization is not the only goal of MRI. 
 
The Amana Growth fund mentioned in the previous article provides an example to contradict the blanket assumption that moral preference hurts the bottom line.  Amana Growth showed a rate of return from 2003-2005 that “crushed” the S&P 500 by 11 points per year. [1]  This is not merely an exception, but an example of the success moral funds can achieve, a success much doubted by traditional economists.  One example does not establish that the assumption is completely incorrect, but it does go to show that MRI and profitability are not mutually exclusive concepts. 

On the other hand, arguably maximizing profit indeed allows the satisfaction of the moral needs of investors.  Since investors in any public corporation or investment fund likely come from varying religious, cultural and socio-economic backgrounds, investors within the same investment will have very diverse moral preferences. [2]  By maximizing profits returned to each investor, the traditional model does allow each individual to use those profits more discretely to reach their own diverse moral preferences.  Thus, by returning the maximum profit to the investor, the investor’s moral preferences are more directly addressed. 

However, this argument overlooks key practical factors.  The argument assumes that investors will in fact have the time and know how to use those maximized profits to satisfy their social preferences.  But the antitheses of these assumptions are the reasons for establishing corporations and mutual funds.  Investors lack the time and sophistication to investigate business opportunities and investments, so they trust their money to managers, both corporate directors and fund managers.  Investors knowingly relinquish some control to managers in return for expertise and decreased time commitment.  Thus, these practical factors weigh in favor of further promoting managers to exercise socially responsible business decision making where investors seek such a preference. 

Assumption B. Corporate law imposes on managers a duty above all others to maximize profits.

Traditionally, corporate directors have been assumed to have one duty, maximize profitability.  Dodge v. Ford is often cited for this proposition. [3]  However, the same Court did not disagree with the proposition that a corporation could carry on charitable works for the benefit of society incidental to the corporation’s main business. [4] Thus, the legal paradigm does provide wiggle room for corporate directors to be morally conscious. 

Further, the relationship between directors and shareholders is a contractual one.  The law allows for contracting parties to come to mutually agreed to relationships.  Such a relationship could be based on shared business and moral preferences and thus would be within the freedom to contract. 

C.  Because of the structure of the public corporation, a gap will always exist between ownership and control. 

Ownership lies with the investors, while control remains with the directors.  Owners do exercise control by voting for directors, or instead by selling their stake in the investment.  Even with this voting ability, investors lack the ability to take part in day to day decision making.

MRI can bridge this gap.  By selecting investments where directors share similar social goals for the corporation, investors are able to select directors with similar moral preferences.  Thus, although investors are not directly participating in business decisions, investors are assured that directors will make decisions in line with the investors’ moral preferences.  For these investors, profit is not the only consideration when making a decision.  Similarly, by allowing directors to allow moral preferences to guide business decisions, the investors’ desires are more completely fulfilled. [5]  Thus, MRI does help to close the gap between ownership and control that remains in the traditional for-profit corporate structure. 

III. Possible Future Developments

Basing a contractual relationship in this setting on MRI principles, however, may raise a new legal claim: the shareholder derivative action for the failure to remain socially responsible.  This would be in contrast to the traditional shareholder derivative action for failure to maximize profits.  The courts have deferred to the management-biased business judgment rule concerned that courts are not most capable to make business judgments and out of fear of hindsight decision making.  Analogously, courts would likely continue to defer to managerial business decisions fearing the same concerns where social benefit, rather than profit, has been agreed to as part of the goal of the corporation.  However the courts handle such a claim, the freedom of contract does and should continue to allow investors and managers to establish relationships based on moral preferences.

[1] Kimberly Lankford, Funds Get Religion, Kiplinger’s Personal Finance Magazine, http://www.kiplinger.com/magazine/archives/2005/12/askkim.html, (Dec. 2005).

[2]  E.S. Adams and K.D. Knutsen, A Charitable Corporate Giving Justification for the Socially Responsible Investment of Pension Funds: A Populist Argument for the Public Use of Private Wealth, 32 Dayton L. Rev. 275, 286 (1995). 

[3] Id. 

[4] Dodge v. Ford Motor Co., 170 NW 668 (Mich. 1919).

[5]  J. Nusterek, Corporations, Shareholders and Moral Choice: A New Perspective on Corporate Social Responsibility, 58 U. Cin. L. Rev. 451, 466 (1989).