Business persons and lawyers have long debated whether a business corporation does or should have a purpose other than advancing shareholder interests. In a democratic, pluralist society, the issue of corporate purpose remains important and will not (and should not) go away. However adamantly divergent descriptive and prescriptive positions are held, it is healthy that, periodically at least, the debate is revisited and disagreements aired. Neither corporate law nor business practice demands an unequivocal or uniform resolution. Different businesses will continue to answer the corporate purpose question differently.
Early American business corporations were expected to advance a public-serving purpose. Over the nineteenth century, a more private-gain seeking emphasis evolved. As corporate influence grew, periodic debates arose over corporate purpose. The most famous debate was the Depression-era exchange between E. Merrick Dodd, who championed a multi-stakeholder approach, and Adolf Berle, who, despite grave concerns about concentrated managerial power, advocated shareholder primacy.
The mid-twentieth century brought continued debate. Economist Milton Friedman famously argued in favor of profit-maximizing, while renowned managerialist Peter Drucker and Harvard Business School professor Robert Anthony opposed an exclusive focus on shareholders.
Shareholder wealth maximization was bolstered in the 1970s by a handful of financial theorists. Ignoring positive law, their models disaggregated the complex corporate institution into a simplistic, privately-ordered “nexus of contracts” and “principal-agent” construct.
The 1980s witnessed shareholder wealth maximization gain a deep hold in corporate America as an ironic outcome of the frenetic hostile takeover activity of that decade. Target company management resisted hostile efforts and prevailed on the law front as state legislatures and the Delaware Supreme Court granted managers wide discretion in resisting unwanted overtures. But the norm of shareholder wealth maximization was widely internalized, and it dominated business school and law school teaching. The influential Business Roundtable embraced shareholder primacy in 1997, adopting a shareholder wealth emphasis it abandoned only in August 2019.
A recent exchange between two Wall Street law firms highlights existing controversy about the state of positive law on corporate purpose. In a May 2020 essay, “On the Purpose of the Corporation,” lawyer Martin Lipton recalled the 1980s takeover era to advance his Merrick Dodd-like view that corporate boards may “manage for the benefit of all stakeholders over the long term.” Lawyers at Skadden Arps countered that Delaware law imposes a fiduciary responsibility on directors to do “what is in the best interests of shareholders….”
Numerous corporate law scholars have argued that most states clearly permit, but do not require, a multi-stakeholder focus and that Delaware law is agnostic on corporate purpose. Such scholars, joined by Lipton, signed a four-page position paper to this effect in October 2016 called “The Modern Corporation. Statement on Company Law.” It states, among other things: “Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximize profits for their shareholders.”
Many scholars and jurists disagree with these views, arguing that Delaware law is not permissive or agnostic, but requires a shareholder wealth emphasis. Former Delaware Supreme Court Chief Justice Leo Strine and Vice-Chancellor Travis Laster, for example, have repeatedly insisted that directors must maximize value for stockholders over the long term.
The very fact of the ongoing debate, reflecting good faith disagreement among knowledgeable experts, reveals that the law is far from crystal clear. The Delaware Supreme Court itself has spoken only of “enhancing” corporate profits and seeking “benefits” for shareholders – not “maximizing,” at least outside the narrow sale of control context addressed in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. This restraint by our nation’s highest corporate law tribunal is striking. It also seems deliberate, and wise, in the face of longstanding, significant disagreement over corporate purpose.
Why Corporate Purpose Matters
Notwithstanding the desire of certain commentators to end the debate and pronounce a victor, the subject of corporate purpose will (and should) endure as a topic of ongoing importance. The Covid-19 pandemic certainly spotlighted the issue as self-sacrificing workers continued to provide vital goods and services to customers – but did not do so only to make shareholders more money. Unlike what we hope will happen to the pandemic itself, the corporate purpose issue has never gone away.There are many reasons why the question of corporate purpose will remain a lively and important subject in the United States, a few of which I identify. This staying power reflects the failure of any one conception of the corporation to vanquish competing views, the surprising range of activities where the issue arises, and the recognition that society’s quest for greater institutional diversity extends to corporate endeavor.
1. Corporations Are Separate Legal and Cultural Persons, Distinct from Stockholders and Stakeholders
Positive law establishes that corporations are distinct legal persons. In language and cultural practice, the corporation is not equated with stockholders or other intra-corporate groups. The term “corporation” is used in law and social discourse to refer to particular businesses and to the business institution itself more generally. We meaningfully speak of Facebook and Exxon and countless other specific companies. In doing so, we are not talking about stockholders or other groups. This distinctive, unique personality makes it imperative that each individual corporation determine its own purpose.
2. Corporate Purpose Is Not the Same as Shareholder or Stakeholder Purpose
The socio-legal differentiation of corporateness means that a shareholder’s (or the collective shareholders’) purpose, or an employee’s (or the collective employees’) purpose in participating in a business does not equate to the corporation’s purpose, any more than the departure or arrival of a shareholder or employee alters corporate existence. Business corporations provide products or services. That is their purpose.
3. Pluralism in Corporate Purpose Is Essential to a Healthy Business Ecosystem
Ecological monocultures are unhealthy and unsustainable, particularly when exposed to abrupt shock. A business ecosystem in which all companies have a single purpose – simply to maximize shareholder wealth – would expose all companies to great risk from a systemic shock centered around that purpose. Conversely, if different companies pursue different purposes, shocks to some sectors or businesses are not shocks to all, reducing systemic risk.
In fact, different companies do pursue different purposes because they provide different types of goods and services, their main goal. Success rewards shareholders and others and failure harms them. But the outcomes for shareholders and others are the result of corporate endeavor, not the purpose of it.
There is no reason why, with respect to business corporations, there cannot be a pluralism of market-oriented entities designed to advance different purposes. Sociologist Robert Nisbet emphasized how mediating social structures grow out of shared “communities of purpose,” and how the free market itself is dependent on such social structures and has never “rested upon purely individualistic drives.”
4. Many Business Leaders and Workers See Business as a Calling
Theologian Michael Novak wrote an important book titled, Business As A Calling. He argued that business is a morally serious enterprise in which one can act morally or immorally, and that business requires moral conduct. Making a lot of money immorally, he observed, is widely condemned, just as a sports winner who cheats is dishonored. Novak argued that many entrepreneurs, leaders, and workers seek – and, to varying degrees, find – fulfillment in doing work that benefits others. Young workers today widely report that business purpose matters to them. People are not simply self-serving, materialistic, acquisitive, atomistic individuals; they often are self-sacrificing and seek spiritual and emotional fulfillment as whole persons.
5. All Stakeholders Should Be Treated with Dignity
Human workers are not simply one-dimensional “inputs” into the productive process, as economics terminology so coldly describes them. They are humans with needs, hopes, fears, expectations, and goals (for themselves and their loved ones). Many business leaders provide employees with protection and benefits exceeding those mandated by law and treat their workers with compassion, respect, and dignity. Some do so not from a utilitarian calculus that generosity will pay off, but for moral or religious reasons. Business leaders should not be limited to doing good only when rationally related to the end of shareholder wealth. Workers and other stakeholders should be humanely treated by those with power over them because doing so is good in and of itself, even if detrimental to profits.
Corporate purpose must remain open-ended so that businesses may, if they choose, advance the well-being of persons other than just investors. Treating stakeholders with dignity should not be foreclosed on the ground that it must be linked to enhancing shareholder wealth. As observed by Pope John Paul II, a company’s financial accounts may be in good order, yet people within the business may be humiliated and have their dignity offended.
6. Stockholders Are Heterogeneous and Many Prefer Social Responsibility
Many shareholders desire the companies they invest in to act in socially responsible ways. They should have outlets for their investment preferences. Various meta-studies reveal that companies so acting do not suffer financially.
The choice of business goals carries enormous stakes for all citizens given the vast economic, social, political, environmental, and cultural influence of corporations. American businesses have brought remarkable ingenuity to improving lives in countless ways. Today, the corporate institution should be encouraged and permitted to explore other ways to make various groups in society better off. Let each company, enabled by law not constrained by it, decide for itself where it is going and what road it will take.
This post comes to us from Professor Lyman Johnson at the University of St. Thomas (Minneapolis) School of Law and the Washington and Lee University School of Law. It is based on his recent article, “Why Corporate Purpose Will Always Matter,” available here.