Purpose is currently one of the hottest topics in corporate governance. Commentators are demanding not only that corporations formally articulate a purpose, but that the corporate purpose embrace the interests of non-shareholder stakeholders or society more generally. In August 2019, the Business Roundtable issued a new statement on the purpose of the corporation, which replaced its former support for shareholder primacy with the proposition that corporations be run “for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders.”[1] Shareholders have followed up, and several introduced shareholder proposals during the 2020 proxy season asking signatories of the Business Roundtable statement to explain how they are implementing this new statement.[2] Ironically, one of the recipients of such a proposal is BlackRock, which, despite Larry Fink’s highly-publicized statement that “[w]ithout a sense of purpose, no company, either public or private, can achieve its full potential,”[3] argued to the SEC staff that the shareholder proposal should be excluded.[4]
The shift is more than semantic. The debate over corporate purpose is part of a broader effort to reorient corporate decision-making away from economic value maximization and toward broader societal objectives, not simply as a choice, but as an affirmative obligation. The Davos Manifesto seeks to mandate that all corporations have the purpose of creating value for the benefit of all their stakeholders.[5] The British Academy published a report stating that “the purpose of business is to profitably solve problems of people and planet, and not profit from causing problems.”[6] Senator Elizabeth Warren introduced legislation that would require corporations to be run for the benefit of constituencies, with mandatory employee representation on the board.[7] Around the world, commentators are arguing that corporations should be redirected towards an environmental, social, and governance (“ESG”) purpose. At the extreme, some commentators suggest that corporations should be encouraged to make decisions that deliberately sacrifice economic value in favor of the public interest.
These arguments run counter to the traditional view – a view commonly ascribed to Milton Friedman – that corporations should be managed with the primary goal of pursuing economic value for shareholders.[8] This view is commonly referred to as shareholder primacy. The corporate purpose movement challenges shareholder primacy and argues that corporations should shift their primary objective to a public purpose in order to reduce negative externalities and work toward solving persistent societal problems such as wealth inequality and climate change. The current pandemic highlights the potential conflict between shareholder value and public interest in an economic environment in which, to survive, many businesses will be forced to make tradeoffs between the needs of different constituencies.
In our working paper, available here, we highlight the fact that the debate over corporate purpose lacks a theoretical predicate. Specifically, arguments about the appropriate purpose of the corporation do not address what it means for a corporation to have a purpose, whether corporations should have a purpose at all, and, if so, why. We believe that answering these questions is necessary to provide a framework for further defining the aims, goals, and regulation of the corporation.
The paper goes on to explore theoretical, historical, and practical reasons for corporate purpose. Although the requirement that corporations articulate a purpose is a formal component of state corporation statutes, we show that the prevailing practice is for corporate charters simply to provide that the purpose of the corporation is to engage in any lawful business. Even as some corporations move to associate themselves with a broader stakeholder perspective, they have failed to formalize their purpose in their charters, a practice that we view as rendering those statements aspirational rather than legally binding. We analyze and reject the claim, grounded in the personhood theory of the corporation, that the corporation has ethical, moral, or social obligations that generate an entity-level purpose independent of the objectives of its constituencies.
We evaluate the potential impact of corporate purpose statements on operational decisions and the scope of management’s fiduciary duties. Some commentators claim that existing corporate law compels corporations to operate with the primary objective of maximizing shareholder economic value. We question this proposition, finding limited support for the claim that black-letter law requires shareholder primacy, at least outside the context of takeovers and self-dealing transactions. At a minimum, we argue that the mutability of the corporate charter and the flexibility of the business judgment rule give corporate managers ample decision to consider stakeholder and societal interests. Moreover, increasing evidence suggests that the relationship between stakeholder value and shareholder value is complex and that, from an operational perspective, responsible corporate officials would be well advised to take stakeholder interests into account. The same managerial discretion that we identify as providing corporate officials with the power to do so, however, limits the potential enforceability of a stakeholder-focused statement of purpose, at least if that statement is not formally embedded in the charter. Thus, we reason that articulating a corporation’s purpose in terms of stakeholder value is unlikely to have any legal effect.
Our inability to justify corporate purpose in terms of these traditional rationales does not lead us to reject the value of corporate purpose, however. Instead, we offer a new understanding of the debate over corporate purpose grounded in the instrumental nature of the corporate form. We argue that a corporation is a collective enterprise, involving and interacting with individuals and entities that have a variety of interests. Corporate purpose allows a corporation to signal its priorities to its constituents. This signaling enables those who interact with the corporation – shareholders, suppliers, employees, and customers – to coordinate their expectations and their behavior in order to identify and pursue common goals. It also enables corporate stakeholders to determine the explicit contractual protections they may need to constrain corporate decisions that are inconsistent with those goals. Corporate purpose facilitates these actions by articulating the metrics by which managers are to be held accountable and by informing stakeholders of the degree to which they must seek alternative mechanisms to protect their claims through regulation. Notably, our instrumental account views corporate purpose as a mechanism to provide coherence, transparency, and coordination of corporate decisions.
An instrumental view of the corporation brings a new perspective to the debate over what a corporation’s purpose should be. We argue here that, at least as a default matter, the purpose of a corporation should be understood as maximizing the economic value of the firm. We argue that this default is the only position that adequately protects existing expectancy interests. We stress that a focus on economic value does not imply indifference to the interests of non-shareholder stakeholders; indeed, we maintain that, in pursuing long-term economic value, corporate managers are not merely permitted but compelled to consider the effect of the corporation’s operations on stakeholders and society at large. We leave for future work the normative questions of whether a corporation can or should modify this default as well as the pragmatic question of how it should do so. Ultimately, our findings are designed to provide more rigor and a framework to the current debate about corporate purpose. The world is certainly in flux, as is the corporation. But a sustainable and workable vision of the corporation requires a theoretical foundation. This article provides a starting point for that endeavor.
ENDNOTES
[1] Business Roundtable, Business Roundtable Redefines the Purpose of a Corporation to Promote “An Economy That Serves All Americans,” Aug. 19, 2019, available at https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.
[2] https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2020/harringtongoldman022520-14a8.pdf; https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2019/harringtoncitigroup122019-14a8-incoming.pdf.
[3] Larry Fink’s 2018 Letter to CEOs, A Sense of Purpose, available at https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter.
[4] https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2020/asyousowtrioblackrock012020-14a8-incoming.pdf.
[5] World Economic Forum Davos Manifesto 2020.
[6] The British Academy proposes principles for the age of purposeful business, Nov. 27, 2019, available at https://www.thebritishacademy.ac.uk/news/british-academy-proposes-principles-age-purposeful-business.
[7] Accountable Capitalism Act, 115th Congress (2017-2018) S. 3348.
[8] Milton Friedman, The Social Responsibility of Business is to Increase Its Profits, N.Y. Times Mag. 32 (Sept. 13, 1970) (theorizing that the only “social responsibility of business is to increase its profits”).
This post comes to us from professors Jill E. Fisch at the University of Pennsylvania Law School and Steven Davidoff Solomon at UC Berkeley School of Law. It is based on their article, “Should Corporations Have a Purpose,” available here.