Can we speak of a “purpose” for corporations or, more broadly, corporate law?  The doctrine of shareholder primacy has long had an easy answer: Both individual corporations and corporate law should strive to maximize shareholder wealth.  But this reductive and avaricious principle has begun to fall out of favor.  We see evidence of this change in the letters of Larry Fink, the 2019 Business Roundtable statement, the growth of ESG and other social-justice funds, and the interest in a stakeholder-oriented approach to corporate governance.  As part of this shift, the field of corporate governance has undertaken a renewed focus on corporate purpose.

Corporate purpose encompasses two main ideas: the aims of individual corporations and the overarching purpose of corporate law. Historically, purpose statements in corporate charters set clear operational limits for individual businesses, allowing shareholders to challenge actions that exceeded these bounds. Now, however, charters generally permit businesses to engage in any lawful activities (with the recent exception of benefit corporations). From a business perspective, many corporations find it useful to identify a purpose or mission pursuing higher aims: Starbucks Coffee Company, for example, seeks to “inspire and nurture the human spirit,”^[1] while Meta wants to “bring the world closer together.”^[2]  But such statements are generally slogans with little practical impact.

The broader purpose of corporate law has been a topic of considerable academic debate, particularly concerning whether the law mandates shareholder primacy. While some have pointed out that corporate law does not require prioritizing shareholder wealth, citing the significant discretion afforded directors and officers, shareholder primacy remains entrenched in corporate law and governance. Current law heavily favors shareholders, giving them voting rights, power to hold directors accountable, and control over significant corporate decisions. Even public benefit corporations, designed to transcend traditional shareholder-wealth maximization, are  shareholder-centric.

At the same time, most corporate law scholars still support shareholder primacy as a guiding legal principle, with few advocating for the substantial changes necessary to realign corporate governance with stakeholder interests. The current synergy between corporate purpose and governance is notably streamlined and effective, which may help explain the intellectual appeal of the model. Corporate law theorists have mostly ignored alternative models that could lead to more responsive governance by balancing the interests of various corporate stakeholders.

Corporate purpose inherently involves addressing those interests. The challenge for corporations is to accurately gauge and incorporate the preferences of all their stakeholders – employees, suppliers, creditors, and customers—into their decisions. The shareholder-primacy model largely manages shareholder interests through voting and handles the preferences of the remaining constituents through contract. But this approach grants control of the corporation to one constituency while leaving others to fend for themselves as outsiders.

The current revolt against shareholder wealth maximization is a result of its predictable failures to enhance social welfare. Corporate profits have grown much more than real wages during primacy’s hegemony. Climate change doesn’t fit into shareholder primacy’s matrix; it’s considered an externality, even though many shareholders care about the planet and would be willing to trade some wealth for a healthier environment. Calls for corporate purpose to include the interests of other constituents should not be surprising – if anything, they’ve been unduly delayed. It’s time to turn those words into action.

Corporate purpose must be connected to corporate governance. A corporation whose purpose extends to a broader set of stakeholder interests needs to provide those stakeholders with actual governing power to act upon those interests.  Stakeholders should be able to express their ideas about the corporation’s mission,  function, and culture through structures designed to effectuate those ends. In other words, the key to changing corporate purpose is changing the allocation of power within corporate governance.

One way to do this is through changing the corporate electorate.  Many European companies have integrated workers into the corporate electorate through codetermination, which provides employees with voting rights over a portion of the company’s board or management. Studies have demonstrated that codetermined firms are better at caring for employees, maintaining protections for shareholders, and managing risk.[3] It may make sense to include other stakeholders in the corporate electorate as well.  Ratepayers deserve a role in the governance of public utilities.[4]  Social media users have strong interests in data privacy and content moderation, which could be advanced through  governance power.  Consumers having long-term relationships with products deserve a voice in how that relationship is managed.[5]

Not every stakeholder deserves an equal or even minimal voice in governance. But for stakeholderism to be a credible alternative as a governing philosophy, it must include substantive changes to governance that give at least some stakeholders more power.  By integrating a broader range of stakeholder perspectives into decision-making, corporations can move beyond superficial commitments and genuinely address the diverse needs and preferences of their constituents. Such a shift would ensure that the corporation’s purpose is not merely an abstract notion but pursued through meaningful governance practices. There will, of course, be challenges in assigning relative voting rights among different groups—the normal hurly-burly of political jostling. But while the status quo may look more orderly, it comes at the cost of disenfranchising a swath of corporate actors.

It is time to recognize that the pursuit of a broader corporate purpose requires reforms to corporate governance. Purpose needs power to give it life. Otherwise, the corporate purpose debate will remain as it is today: a meaningless show on the stage of shareholder primacy.

ENDNOTES

[1] Starbucks Coffee Company, Culture and Values, https://www.starbucks.com/careers/ working-at-starbucks/culture-and-values/.

[2] Meta, Meta Investor Relations: FAQ, https://investor.fb.com/resources/.

[3] For a discussion, see Grant M. Hayden & Matthew T. Bodie, Codetermination in Theory and Practice, 73 Fla. L. Rev. 321, 349-57 (2021).

[4] See Aneil Kovvali & Joshua C. Macey, The Corporate Governance of Public Utilities, 40 Yale J. on Reg. 569, 601-03 (2023).

[5] See David G. Yosifon, The Consumer Interest in Corporate Law, 43 U.C. Davis L. Rev. 253, 255 (2009).

This post comes to us from Grant Hayden, Richard R. Lee Jr. Endowed Professor of Law at SMU-Dedman School of Law, and Matthew Bodie, Robins Kaplan Professor of Law at the University of Minnesota Law School.  It is based on their essay, “The Problem of Purpose in Corporate Law,” forthcoming in Houston Law Review, available here.