Today on Public Discourse, Robert Miller explores the legal and economic hurdles facing hotel execs who want to do the right thing.
Hotel Pornography and the Market of Morality
The
legal institutions of a democratic and capitalist society are designed
not to give people what is good and prevent them from getting what is
bad; they are designed to give people what they want and not give them
what they don't want.
Public Discourse recently published a letter from
Professor Robert P. George and Shaykh Hamza Yusuf to executives in the
hotel industry asking that their companies stop selling pornographic
videos in their hotel rooms. George and Yusuf argue that pornography is
morally wrong and thus selling pornography is morally wrong, and I agree
completely. I fear, however, that their request to the hotel executives
will not produce the result they hope.
There
are two reasons for this. George and Yusuf mention the obvious
one--that selling pornographic videos is profitable. But this is truer
than George and Yusuf say. It turns out that many hotels would lose
money offering pay-per-view videos if they did not include pornographic
ones. Such hotels lose money on every sale of non-pornographic videos,
but they make so much money on the pornographic ones that the operation
as a whole turns a profit. Hotels in this situation cannot ditch the
pornographic videos and keep the legitimate ones; they would have to
stop offering all in-room movies. But it gets worse. A sizable
percentage of the earnings of many hotel chains comes from business
travelers, who tend to spend more than other customers. Now, most
business travelers are men traveling alone. Want to take a guess who
buys the most pornographic videos in hotel rooms? That's right: men
traveling alone. Hence, a hotel that stops offering pornographic videos
will certainly lose the earnings attributable to such videos, but it may
also lose a lot more than that because some of its most valuable
customers may shift their business to other hotels. If that happens, the
company loses all the
earnings associated with such travelers--not just the earnings from the
pornographic videos, but also those from room rentals, room service,
drinks and meals in the hotel restaurant, and so on. Giving up the
pornographic videos could be very costly indeed.
The
other reason that it may be hard for executives at hotel companies to
cease offering pay-per-view pornographic videos is that doing so may be
unlawful. Yes, you read that correctly: there is a serious argument that
choosing not to
sell pornographic videos could expose the directors of a corporation in
the hotel business to civil liability to their shareholders. The reason
is that, as explained above, selling pornographic videos makes a lot of
money for the company, and corporate directors are under a fiduciary
duty to maximize profits for their shareholders. This does not mean, as
some uninformed people think, that directors may cause the corporation
to engage in illegal acts to make a profit. On the contrary, directors
who intentionally cause the corporation to do something illegal thereby
breach their fiduciary duty to the corporation, no matter how much money
can be made by illegal conduct. The directors' duty is to maximize
profits within the law.
But as George and Yusuf point out, selling pornography is perfectly
legal. So the question becomes whether corporate directors, consistent
with their fiduciary duty to maximize profits within the law, may cause
the corporation to terminate a highly profitable and perfectly legal
operation merely because the directors conclude that the operation is
immoral.
I
am aware of no modern case treating this issue; it is an open question
in the law. Is it the duty of corporate directors to choose the course
of action that they honestly believe will maximize profits within the
law regardless of moral considerations, or is it their duty to exercise
moral judgment as well as business judgment and so to choose the course
of action that they honestly believe will maximize profits within the
law and within the constraints of morality as the directors see them? In
my opinion, the latter ought
to be the law, but as to what the law actually is--what, for example, a
Delaware court presented with the issue would actually hold--I do not
know. No one knows.
One
thing that is certain, however, is that if a public company in the
hotel business announced that it was ceasing to offer pay-per-view
pornographic videos because the directors thought that doing so was
immoral, some of its shareholders, encouraged by the plaintiffs' bar,
would sue the directors alleging that their decision breached their
fiduciary duty to the corporation. If the plaintiffs won, the directors
would be personally liable for all the lost profits attributable to
their decision. For a large hotel chain maintaining hundreds of
thousands of guest rooms, the potential liability for the directors
would be enormous. Not many corporate directors would expose themselves
to bankrupting civil judgments in order to do the right thing here.
Oddly,
however, a board of directors that stopped selling pornographic videos
for moral reasons could escape all liability to its shareholders if it
was willing to lie about its reasons. That is, the directors could say
that, in their judgment, selling pornographic videos offends so many
customers that in the long run the company would make more money by not
selling such videos. Then, regardless of how implausible this theory may
be, under the corporate law doctrine known as the business judgment
rule, a court would not intervene and would not hold the directors
liable, provided the directors claim to honestly believe the explanation
they were offering the court. Since George and Yusuf say in their
letter that they are not planning to organize a boycott of hotels
selling pornographic videos, they have inadvertently undermined such a
stratagem. But this hardly matters, because directors who object to
pornography on moral grounds are not likely to be willing to lie about
the corporation's business to its shareholders, much less perjure
themselves in court.
But
let us assume, as I think right, that the law allows directors to
exercise moral judgment as well as business judgment and would protect
their decision to choose, for purely moral reasons, a course of action
that fails to maximize profits for shareholders. Assume further that,
having read George and Yusuf's letter, the directors of the various
hotel corporations decide to terminate sales of pornographic videos in
their hotels. Then what? I doubt we would soon see the end of
pay-per-view pornographic videos in hotel rooms. The reason is that, if
the companies' shareholders disagree with the moral judgment of the
directors, they can vote such directors off the board and replace them
with individuals who agree with the shareholders on moral matters.
Hence, to stop hotels from offering pay-per-view pornography, we will
need to convince not only the directors of such companies but also their
shareholders that they should accept lower profits in order to do the
right thing. Given the broad shareholder base of most public companies,
and given too that when a shareholder objects on moral grounds to the
corporation's actions, his usual response is to sell his shares to
someone who does not object
to the corporation's actions, we would need to convince a large portion
of the population, not just some hotel executives, that selling
pornographic videos is morally wrong.
There
is an important lesson here about how our society is organized, and it
can be best brought out by a comparison. Like pornographic videos,
videos espousing racist views are immoral but legal, but we never find
such videos on offer in hotel rooms or, for that matter, almost anywhere
else. Why not? Obviously, because practically everyone nowadays finds
racist views deeply offensive, and any company that attempted to make
money selling such trash would be severely punished by the market. The
situation is different with pornographic videos because a significant
portion of the population wants to watch such videos and, more
importantly, a large majority of the population doesn't object to their
doing so. With racist videos, market institutions reinforce a moral
result; with pornographic videos, market institutions reinforce an
immoral result. The lesson is that, when a people's desires are
consistent with moral norms, markets produce moral results, but when a
people's desires are inconsistent with moral norms, markets produce
immoral results. The economic institutions of capitalism are thus
analogous to the political institutions of democracy. With limited
exceptions, laws can be enacted and enforced in a democratic society
only if they command the support of a large majority of the population.
Hence, it is not so much wrong as it is impossible to impose moral norms
through law: the only norms that can be imposed in this way are norms
that already command broad support.
The
legal institutions of a democratic and capitalist society are not
designed to give people what is good and prevent them from getting what
is bad; they are designed to give people what they want and not give
them what they don't want. For this reason, some people decry capitalism
and democracy as amoral. Such views are misguided. In a democratic and
capitalist society, there is a certain division of labor: it is up to
the people themselves to become moral individuals with moral desires,
while the political and economic institutions of the society implement
the individuals' aggregated desires. In any alternative system, there
are institutions not accountable to the people and powerful enough to
impose their will (really the will of the individuals who control the
institutions) on everyone who disagrees with them. The historical record
of such institutions has been terrifying, which is the best argument in
favor of democratic capitalism. It is true that, in such a system, it
may be harder to be moral when your understanding of morality is
different from the majority view, but at least you will not often be
forced into doing what you think is wrong. You may be seduced, but you
will not be coerced. Democratic capitalism is a moral system, but in
this system the guardians of morality are not institutions but the
people themselves. Thus we read in the Book of Wisdom, A large number of wise men is the safety of the world.
Robert
T. Miller is a Professor of Law at Villanova University, and as of
August 2012 he will be a Professor of Law and Sandler Faculty Fellow of
Corporate Law at the University of Iowa.
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