A Contractarian Defense of Corporate Philanthropy

Abstract

Statutory and case law make it clear that corporate officers and directors have very wide discretion to direct reasonable amounts of corporate resources toward artistic, educational, and humanitarian causes, even if those causes have only a remote connection (or no obvious connection at all) to the business goals and profitability of the firm. This stance of the law has been defended primarily by reference to an "entity" theory of the firm. By contrast, contractarian legal scholars, who view the corporation in terms of a principal-agent model, with shareholders as principles, and officers and directors as their agents, have argued that corporate giving, if it is permitted at all, should be strictly limited to those situations in which the benefit to the firm in the form of higher expected profits is clear and compelling. This paper provides an alternative defense of managerial discretion with respect to corporate philanthropy that embraces contractarian reasoning but follows that reasoning to a different conclusion. The argument uses a "team production" model to make the case that the mutual "contract" that corporate participants enter into requires granting directors very wide discretion in making decisions about the use of corporate assets, including discretion to use corporate assets for philanthropic causes or charitable causes.