The illusion of stakeholder governance: Corporate purpose or corporate spin?

2 Accounting, Economics, and Law (2012)By the beginning of the twenty-first century, many observers had come to believe that U.S. corporate law should, and does, embrace a "shareholder primacy" rule that requires corporate directors to maximize shareholder wealth as measured by share price. This Essay argues that such a view is mistaken.As a positive matter, U.S. corporate law and practice does not require directors to maximize "shareholder value" but instead grants them a wide range of discretion, constrained only at the margin by market forces, to sacrifice shareholder wealth in order to benefit other constituencies and the firm itself. Although recent "reforms" designed to promote greater shareholder power have begun to limit this discretion, U.S. corporate governance remains director-centric.As a normative matter, several lines of theory have emerged in modem corporate scholarship that independently explain why director governance of public firms is desirable from shareholders' own perspective. These theories suggest that if we want to protect the interests of shareholders as a class over time-rather than the interest of a single shareholder in today's stock price-conventional shareholder primacy thinking is counterproductive. The Essay reviews five of these lines of theory and explores why each gives us reason to believe that shareholder primacy rules in public companies in fact disadvantage shareholders. It concludes that shareholder primacy thinking in its conventional form is on the brink of intellectual collapse, and will be replaced by more sophisticated and nuanced theories of corporate structure and purpose.

By the beginning of the twenty-first century, many observers had come to believe that U.S. corporate law should, and does, embrace a “shareholder primacy” rule that requires corporate directors to maximize shareholder wealth as measured by share price. This Essay argues that such a view is mistaken.As a positive matter, U.S. corporate law and practice does not require directors to maximize “shareholder value” but instead grants them a wide range of discretion, constrained only at the margin by market forces, to sacrifice shareholder wealth in order to benefit other constituencies and the firm itself. Although recent “reforms” designed to promote greater shareholder power have begun to limit this discretion, U.S. corporate governance remains director-centric.As a normative matter, several lines of theory have emerged in modern corporate scholarship that independently explain why director governance of public firms is desirable from shareholders’ own perspective. These theories suggest that if we want to protect the interests of shareholders as a class over time—rather than the interest of a single shareholder in today’s stock price—conventional shareholder primacy thinking is counterproductive. The Essay reviews five of these lines of theory and explores why each gives us reason to believe that shareholder primacy rules in public companies in fact disadvantage shareholders. It concludes that shareholder primacy thinking in its conventional form is on the brink of intellectual collapse, and will be replaced by more sophisticated and nuanced theories of corporate structure and purpose.

A Welcome Shift Away from Shareholder Supremacy - Significance of the US Business Roundtable New Statement in August 2019

On August 19, 2019, the U.S. Business Roundtable (BR), comprising the CEOs of more than 200 of America’s largest corporations, issued a new mission statement on “the purpose of a corporation†(BR, 2019). The press release noted that each periodic update on principles of corporate governance since 1997 had endorsed the principle of maximizing shareholder value. In contrast, the new statement commits signatory CEOs “to lead their companies for the benefit of all stakeholders--customers, employees, suppliers, communities and shareholders†(BR, 2019). “[Milton] Friedman must be turning in his grave,†a Fortune magazine article declared (Murray, 2019).

This Article presents a critique of corporate governance theory against the background of a fundamental transformation of the political economy in which the corporation is embedded. This transformation is effectuated, on the one hand, by the denationalization and privatization of corporate governance rule making, which now encompasses a wide range of new transnational fora and actors. On the other hand, this transformation is a substantive one which touches on the core beliefs that have shaped corporate law and corporate governance for more than a century. The coalescence of these two driving forces places the current debate around “corporate purpose” and alternative visions of the corporation in the context of political economy changes which require a serious engagement with the question how it can be prevented that the corporation continues to become even further insulated from democratic political intervention. With these two forces in mind, this Article makes a socio-legal intervention, exploring the actual, regulatory landscape of corporate governance norm production today. We study the connections between law and norm creation on both the nation-state and the global level – rather than treating transnational law as the exception – and seek to engage corporate governance as part of a larger critique of law’s troubled relationship with the business corporation as an entity that exists not only in legal doctrine but in a wealth of actual socio-economic relationships. Complementing this analysis, the Article engages with the question whether the corporation’s purpose can be exhaustively be captured by tying it to the maximization of shareholder value. In light of the global financial crisis and its devastating consequences not so long ago, particularly for retail investors, workers and mortgage debtors, and the present-day collapse of world-wide economic activity due to Covid-19, it would seem unlikely were we to find that the allegation, uttered some two decades ago, whereby the shareholder value maximization paradigm constituted the “end of history of corporate law”, was still seen to be true. But, this very belief seems alive and well so that when, in the spring of 2020, business appeals to government for “rescue” in an historically unknown fashion, we must take a closer look at the historical relationship between “the state” and “the market.” What becomes evident from a historical perspective is the linearity of how mainstream corporate law has over time prepared the ground for a far-reaching autonomization and insulation of corporate governance from “society at large.” The Article analyzes the arguments and policies in support of this alleged autonomy of corporate governance and finds that the roots reach deeper than even the current debates over “stakeholderism” let on. While we are intrigued with the recent advances made in these debates and by important “players” such as the Business Roundtable, it is not at all clear what their lasting impact might be. Our analysis shows that corporate law’s distance from “non-shareholder” interests has long been tied into an economistic concept of the business corporation, from which all memory of the corporation as creature of law is eventually removed. By depicting the corporation through the concept of an in itself reductionist “nexus of contracts” that prioritizes investor-management relations at the exclusion of all other contractual and affected stakeholders of the firm, corporate governance can “take off” into Rudolf Ihering’s heaven of “pure legal concepts”, all the while betraying its deeply ideological character and actual economic and political power.

The debate about corporate purpose is a recurring one that has re-emerged today. What should be the guiding principles of business: the pursuit of profit or a contribution to public interest? We trace key elements in this debate in Britain and America, from the interwar years, when John Maynard Keynes and Adolf Berle made important contributions, to the 1970s, when events ushered in a return to laissez-faire and the rise to dominance of the shareholder primacy model of corporate governance and purpose, to today. Both the earlier and the current debates are centered around whether we see business institutions as strictly private entities, transacting with their suppliers, workers, and customers on terms agreed with or imposed upon these groups, or as part of society at large and therefore expected to contribute to what society deems to be its interests. Whether current developments will ultimately produce a shift in corporate purpose akin to the one that followed the Second World War remains to be seen. But the parallels to the interwar debates, and the uncertain economic, political, and social environments in which they took place, are striking. Our objective is to see what might be learned from the past to inform the current direction of thought concerning capitalism and corporate purpose.

An oft-advanced claim by defenders of shareholder primacy is that a move toward stakeholderism would reduce corporate value, and even stakeholder value, because it would increase agency costs. By contrast, the narrow mandate to maximize shareholder value is easy to enforce and monitor, leaving management with little room to slack or self-deal. But this argument neglects that the shareholder primacy mandate has beyond past shareholder wealth maximization and toward an “enlightened” standard that incorporates long-term value and even stakeholder interests. This book chapter discusses how an evolving view of shareholder primacy complicates its best defense. Specifically, directing management to promote long-term value creation undermines shareholder monitoring and enforcement, eroding the traditional agency cost justification. But rather than portending the end of managerial accountability, the enlightened shareholder value standard has necessitated new thinking about accountability in governance. In particular, existing accountability mechanisms have been refashioned to take a broader set of interests into account, helping to ensure fidelity to an enlightened standard. These developments have also laid the foundation for a move toward a stakeholder governance model by rendering its implementation less challenging and costly than its opponents contend. Prepared for the RESEARCH HANDBOOK ON CORPORATE PURPOSE AND PERSONHOOD (Elizabeth Pollman & Robert Thompson, eds., Forthcoming 2021)

In this paper I review Prosperity, which was published in 2018 by Colin Mayer, Professor and former Dean at the Said Business School at the University of Oxford. In Prosperity we find a passionate defence of the corporation as an institution. Mayer’s criticism mainly refers to how corporations have misbehaved and failed us in our era. As to possible remedies, M. rejects regulation as an appropriate response, save for financial firms. He would mainly rely on private law and corporate governance as a means to ground commitment to corporate purpose. He also suggests specifying corporate purpose in the articles of association of companies, a solution that has been recently adopted by the French legislator allowing them to define their raison d’etre in the statute. I argue, however, that there are limits to this remedy, for the wording of corporate purpose will often be generic; managers will always find ways to circumvent it; shareholders will find it difficult to monitor compliance; enforcement of similar undertakings in cases of breach will be too difficult. I also argue that regulation should have a greater say in disciplining corporations than Mayer suggests. We cannot rely on corporate governance and shareholders as the main instruments to preserve the integrity of corporations. A balanced view of corporate purpose requires a multidisciplinary approach to the corporation. No enlightened CEO would manage a large corporation by looking narrowly at the financial capital or by targeting exclusively shareholder wealth creation. Rather, she will consider all types of capital and try to optimize the management of each of them if she wants the firm to grow sustainably. Indeed, stakeholders are taken care of even in countries that do not follow the German model of corporate governance, but a shareholder primacy model. Stakeholders’ protection in these countries mainly depends on either contracts or regulation (such as environmental and labour laws), but also on corporate governance to the extent that stakeholders’ interests are considered at board and management levels. In particular, the theory of enlightened shareholder value suggests that shareholder wealth should be maximized in the medium-long term, which requires the interests of stakeholders to be met as a condition for maximizing the value of the firm. In conclusion, I argue that corporate purpose should be seen from the intermediate perspective of the enlightened shareholder value theory, which represents a sort of compromise between the traditional shareholder primacy theory and the stakeholder approach to the corporation. Moreover, corporate purpose should be specified and implemented in practice mainly by the board of directors and the top managers, who should reconcile the interests of the shareholders with those of other stakeholders and the community in general. There is no need to specify the purpose of the corporation in its charter, even without considering the difficulties of such a definition and of its enforcement in practice. The criticisms developed in this paper, however, do not detract from the obvious merits of Prosperity which are also highlighted. This excellent book will stimulate fresh thinking and research on corporate governance and the future of the enterprise in modern capitalism. In addition, it will influence the work of legislators and the action of those constituencies that want to defend the corporation from political attacks and heavy regulatory interference, while promoting its integrity and prosperity.

An increasing number of firms make reference to the pursuit of environmental and social goals in the definition of their purpose. This raises important issues with respect to the way in which the trade-offs between profit maximization and social value should be solved. As I show in this chapter, there are different perspectives that can be adopted to this end depending on the field of scholarship selected: economics, finance, management and law. Each perspective offers different nuances as to the way in which corporate purpose is defined and the conflict between the pursuit of profit and social value is dealt with. In Sect. 4.2 of this chapter, I argue that a broader concept of corporate purpose has gradually emerged over the years in economics, finance and management studies, as a result of various approaches to corporations such as corporate social responsibility (CSR) and stakeholder theory, which have been gradually integrated into the corporate governance framework. Environmental and social sustainability has come to characterize most of the instances of CSR and some core aspects of stakeholder governance, without discarding the pursuit of corporate profits as a long-term goal of the corporation. At the start of this century, sustainability concerns have entered into the area of finance studies through the theory of “enlightened shareholder value” (ESV) and its homologues like “shared value”. In Sect. 4.3 I argue, from a comparative law perspective, that corporate purpose has been variously defined in different jurisdictions, while European laws often consider the company’s interest rather than corporate purpose. However, corporate purpose is generally identified in practice with the pursuit of corporate profits, albeit with variations concerning the relevance of given stakeholders and social values in corporate governance. In general, legal definitions of corporate purpose are flexible and allow for different types of solution of the conflict between economic value and social value at firm level and within a given system. In Sect. 4.4 I critically analyse recent economics and management studies which argue that corporate purpose should be modified to reflect the prevalence of social value over shareholder value, and that the latter should be pursued by managers only derivatively, as a result of pro-stakeholders actions directed to increase the “total pie”. I object to this recent trend from a law and finance perspective and show my preference for keeping the relevant discussion within the confines of ESV theory. However, I admit that corporate purpose should be larger than profit from a behavioural perspective if we want to motivate people to perform outstandingly and sustainably in organizations. In Sect. 4.5, I emphasize the mounting role of regulatory and ethical constraints to business conduct deriving from sustainability concerns. These constraints go beyond the mere calculus required by ESV, which asks management to pursue stakeholder interests only to the extent that this increases the long-term value of the firm. Indeed, ethical considerations as reflected by international standards and consolidated best practices should apply to the running of businesses without necessarily requiring a prior analysis of their precise impact on financial performance.

An increasing number of firms make reference to the pursuit of environmental and social goals in the definition of their purpose. This raises important issues with respect to the way in which the trade-offs between profit maximization and social value are solved. As I show in this chapter, there are different perspectives that can be adopted to this end depending on the field of scholarship selected: economics, finance, management and law. Each perspective offers different nuances as to the way in which corporate purpose is defined and the conflict between the pursuit of profit and social value is dealt with. In section II of this chapter, I argue that a broader concept of corporate purpose has gradually emerged over the years in economics, finance and management studies, as a result of various approaches to corporations such as corporate social responsibility (CSR) and stakeholder theory, which have been gradually integrated into the corporate governance framework. Environmental and social sustainability have come to characterize most of the instances of CSR and some core aspects of stakeholder governance, without discarding the pursuit of corporate profits as a long-term goal of the corporation. At the start of this century, sustainability concerns have entered into the area of finance studies through the theory of “enlightened shareholder value” (ESV) and its homologues like “shared value”. In section III I argue, from a comparative law perspective, that corporate purpose has been variously defined in different jurisdictions, while European laws often consider the company’s interest rather than corporate purpose. However, corporate purpose is generally identified in practice with the pursuit of corporate profits, albeit with variations concerning the relevance of given stakeholders and social values in corporate governance. In general, legal definitions of corporate purpose are flexible and allow for different types of solution of the conflict between economic value and social value at firm level and within a given system. In section IV I critically analyse recent economics and management studies which argue that corporate purpose should be modified to reflect the prevalence of social value over shareholder value, and that the latter should be pursued by managers only derivatively, as a result of pro-stakeholders actions directed to increase the “total pie”. I object to this recent trend from a law and finance perspective and show my preference for keeping the relevant discussion within the confines of ESV theory. However, I admit that corporate purpose should be larger than profit from a behavioural perspective if we want to motivate people to perform outstandingly and sustainably in organizations. In section V, I emphasize the mounting role of regulatory and ethical constraints to business conduct deriving from sustainability concerns. These constraints go beyond the mere calculus required by ESV, which asks management to pursue stakeholder interests only to the extent that this increases the long-term value of the firm. Indeed, ethical considerations as reflected by international standards and consolidated best practices should apply to the running of businesses without necessarily requiring a prior analysis of their precise impact on financial performance.

This article argues that conceptualising corporate purpose as a normative question which can be examined in isolation from its socio-historical context is inappropriate and ultimately futile. Corporate purpose is examined here as historically determined, a social fact, independently from whichever theoretical position might prevail in scholarly debates. Interestingly, corporate law doctrine pertinent to corporate purpose has remained mostly static but fairly open-ended. This has allowed purpose itself to oscillate between shareholder primacy and the balancing of stakeholder interests rather seamlessly as a socio-historical phenomenon. However, the article finds that, where it is used by private business organisation, corporate law has a limited capacity to accommodate purpose oscillations. Those are limited to merely one-dimensional movements representing corporate income distribution choices considered as socially legitimate each time. Using concepts such as Polanyi's 'double-movement' and Gramsci's 'passive revolution', the article argues that, for as long as social dynamics focused on wealth distribution, private corporate purpose had little difficulty in absorbing social critique and in finding a legitimacy basis for the private business corporation. However, more recently, critique has been shifting away from merely distributional trepidations and towards other non-economic concerns caused by economic growth per se. These concerns add new dimensions for corporate purpose oscillations, which cannot be accommodated irrespective of how open-ended corporate law doctrine on purpose might be. The article concludes with an analysis of what this might entail for corporate law as a socially legitimate structure for private business.

Japan’s Corporate Governance Code From the Perspective of ‘Sustainable Growth of the Company and Improvement of Medium- to Long-Term Corporate Value’

Economic inequality is soaring and the consensus in some circles is that corporations’ myopic focus on profits is largely to blame. At first glance a stakeholder approach would seem an appealing solution: surely if the purpose of corporations were not wealth maximization for shareholders but rather to create value for all constituents — thus including employees, customers, suppliers, and communities — we would make strides towards combating inequality, the theory goes. Corporations themselves, through their powerful lobbying group, the Business Roundtable, recently disclaimed shareholder primacy and embraced stakeholder theory. However, far from successfully redressing inequality, a stakeholder approach is unlikely to achieve meaningful redistribution of power and resources to weaker constituents and would likely work in the opposite direction. We suggest that a stakeholder approach gives corporate executives both a sword and a shield with which to preserve their advantageous status quo. First, executives can justify stepped up lobbying efforts as part of their mandate to consider the interests of all constituents, capturing the agenda with respect to distributing more power and resources to weaker constituents. Second, because a switch to a stakeholder approach would appear as a significant change — despite not actually accomplishing meaningful redistribution — it would require significant political capital to be adopted, and once adopted would occupy an out-sized portion of legislative and regulatory space, depleting energy and resources necessary to pass reform that is more likely to actually impact inequality. In fact, in reviewing the likely drivers of inequality, we find that key factors include higher concentration leading to the shrinking of the labor share and increased monopsony in labor markets, the gradual weakening of worker protections from labor market institutions, and giving up on progressive taxation as a re-distributive mechanism. Broadening corporate purpose alone would do next to nothing to impact these fields, so to address rampant economic inequality corporate scholars will need to eschew the academic silo and reach across disciplines to identify more effective policies.

When it comes to determining what is the objective of a large public company there are two dominant theories that are employed around the world. They are the shareholder value theory (also known as ‘shareholder primacy’ or ‘shareholder wealth maximization’) on the one hand, and the stakeholder theory on the other. Generally speaking, Anglo-American corporate law embraces the former, and in countries such as the UK, US, Canada, Australia and Ireland public companies apply shareholder value as their guiding light. Much has been written about the shareholder value approach, and the reasons why it should be implemented. But what has rarely been considered is: what does it actually mean and what does it involve? How does one determine whether a company has been managed in such a way as to achieve shareholder value? The main aim of this paper is to address those questions. The paper, after providing some background to the theory, examines what the theory actually stands for, and this involves an identification of the primary reasons given for the employment of the theory. Next, the paper seeks to ascertain what is meant by shareholder value and what it means to operate a company pursuant to the theory. One of the major selling points of shareholder value is that it is certain and clear. The paper finds that the meaning of shareholder value is in fact not clear and certain. Indeed, it is rather disturbing that there has been so little consideration of how such an influential theory in corporate life is applied in commercial terms. Equally worrying is the fact that there is a lack of consensus among its advocates as to what it involves.

When it comes to determining what is the objective of a large public company there are two dominant theories that are employed around the world. They are the shareholder value theory (also known as ‘shareholder primacy’ or ‘shareholder wealth maximization’) on the one hand, and the stakeholder theory on the other. Generally speaking, Anglo-American corporate law embraces the former, and in countries such as the UK, US, Canada, Australia and Ireland public companies apply shareholder value as their guiding light. Much has been written about the shareholder value approach, and the reasons why it should be implemented. But what has rarely been considered is: what does it actually mean and what does it involve? How does one determine whether a company has been managed in such a way as to achieve shareholder value? The main aim of this paper is to address those questions. The paper, after providing some background to the theory, examines what the theory actually stands for, and this involves an identification of the primary reasons given for the employment of the theory. Next, the paper seeks to ascertain what is meant by shareholder value and what it means to operate a company pursuant to the theory. One of the major selling points of shareholder value is that it is certain and clear. The paper finds that the meaning of shareholder value is in fact not clear and certain. Indeed, it is rather disturbing that there has been so little consideration of how such an influential theory in corporate life is applied in commercial terms. Equally worrying is the fact that there is a lack of consensus among its advocates as to what it involves.