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.