Clash of Norms: Shareholder Primacy vs. Sustainable Corporate Purpose

Abstract

Shareholder primacy poses a fundamental challenge to sustainability. The maximization of returns to shareholders tends to externalize the negative environmental and social impacts of corporate activity, ensuring that social and environmental impacts remain on the margins of corporate concern, rather than as the defining limits of their activity. Yet, comparative research into company law has shown that mainstream legal-economic assumptions enshrining shareholder primacy as a legal purpose of the corporation are incorrect: shareholder primacy is a social norm, not a legal norm embedded in statute. This article explores the interaction of company law with social norms, notably shareholder primacy and sustainability, to develop a ‘regulatory ecology’ of corporate purpose. Building on the results of comparative company law research, we deploy a polycentric analysis of regulation, in which the regulatory power of law interacts with the regulatory power of markets, social norms and material constraints. We focus on the dominance of the shareholder primacy norm as fundamental obstacle to corporate sustainability, and consider the options for legal reform to place the legal purpose of the corporation on a socially and environmentally sustainable footing.