How the Chicago Cubs scored a win for stakeholder capitalism

A battle over night games illuminates the importance of business judgment

Fans of the Chicago Cubs may mourn their team’s missing baseball’s postseason after winning the World Series three years ago. But companies that aim to do right by all their stakeholders might want to toast the team from that city’s North Side.

Fifty-one years ago, Philip K. Wrigley, the Cubs’ president and owner of roughly 80% of the stock in the company that owned the club, decided not to install lights at Wrigley Field despite the potential that night games had to boost attendance.

Though lights could have helped to alleviate the team’s money-losing streak of at least five consecutive years, Wrigley believed baseball to be “a daytime sport.” He also thought that playing night games would disrupt the surrounding neighborhood.

William Shlensky, a minority shareholder in the team, sued, alleging that Wrigley was motivated by personal views wholly unrelated to the best business interests of the corporation. Shlensky came to court with evidence that showed the potential of night games to boost attendance for the Cubs, who had failed to follow the lead of every other major league club by hosting home games mainly at night.

For his part, Wrigley said the call to play in the daytime reflected the honest business judgment of a majority of the board and its concern with the potential disruption to the community. (The team would not install lights at Wrigley Field for another 20 years.)

The Illinois Appellate Court in Chicago backed the board but not because the court sided with Wrigley’s assessment. The justices noted that “the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deteriorating” before adding that such decision-making exceeded their ability.

What mattered, they wrote, was “that the decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision.”

In short, the board’s decision reflected its good-faith business judgment. Thus, the court was without authority to substitute its judgment for the judgment of directors. (Courts in Delaware, where many companies are chartered, have ruled similarly.)

The ruling highlights what Lynn Stout, a professor at Cornell Law School who died last year, termed the “myth” of shareholder primacy. As she stressed throughout decades of scholarship, considering the concerns of shareholders to the exclusion of all other stakeholders is not (nor ever was) required by law.

On the contrary Stout observed in “The Shareholder Value Myth,” which she published in 2012:

“The business judgment rule allows directors in public corporations that plan to stay public a remarkably wide range of autonomy in deciding what to do with the corporation’s earnings and assets. As long as they do not take those assets for themselves, they can give them to charity; spend them on raises and health care for employees; refuse to pay dividends so as to build up a cash cushion that benefits creditors; and pursue low-profit projects that benefit the community, society, or the environment. They can do all of those things even if the result is to decrease — not increase — shareholder value.”

In a 2007 article, Stout stressed that the story of shareholder governance derives in part from a tendency among academics to equate the short-term performance of a company’s shares with the financial performance of the company. The price of a company’s shares over the short term are “a dubious metric at best,” she said.

“Gauging corporate performance by measuring share price changes over weeks or months is a bit like picking your accountant by measuring his or her height,” Stout wrote. “It’s easy to do, but unlikely to ensure a good outcome.”