Can Companies Choose Their Corporate Purpose? - Ideas for Leaders
Idea #865

Can Companies Choose Their Corporate Purpose?

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Photo by David Iskander on Unsplash
Photo by David Iskander on Unsplash


The current debate on “the purpose of a corporation” overlooks the duality of corporate purpose—that is, the freedom of individual corporations to choose their purpose on the one hand and the cultural, legal, and institutional constraints that in reality require corporations as a whole to focus on shareholder interests.


Should the purpose of corporations focus on maximizing shareholder value or on attending to the interests of all internal and external stakeholders and society in general? According to corporate purpose scholars Dorothy Lund and Elizabeth Pollman, framing the corporate purpose debate in such unambiguous battle-line terms obscures a fundamental characteristic of corporate purpose that greatly impacts the debate: the overlooked duality of corporate purpose between 1) the freedom of the individual corporation to choose its corporate purpose and 2) the one-size-fits-all implication of the corporate purpose debate that corporate purpose should apply to all corporations.

The history of corporations explains the origins of this duality. In the early years of the U.S., corporations were state-chartered entities; in exchange for their charter, they agreed to use private funds to provide public goods in the community or build infrastructure. By the late 19th century, corporations were established through general incorporation statutes rather than state charters. As a result, the state-mandated “public good” responsibilities disappeared, and every corporation now had full freedom to determine its corporate purpose within the boundaries of legal activities.

The flexibility of each corporation to choose its own purpose is the fundamental characteristic of corporate purpose at the individual level.

This flexibility is lost in the corporate purpose debate. While proponents of shareholder value maximization and proponents of stakeholder interests may disagree on the “purpose of a corporation,” they agree that this purpose should apply to all corporations.

While the role of business in society is an age-old issue, the current corporate purpose debate has its roots in the Industrial Revolution. Instead of relatively small corporations managed by their owners, the Industrial Revolution led to the creation of giant corporations owned by diffused investors and run by powerful professional managers. This power was even more pronounced because many of the safeguards for investors had disappeared with the replacement, as described above, of state charters by incorporation statutes.

The stage for the corporate purpose debate was now set. On the one hand, the investors’ (i.e., shareholders) interests had to be protected from unrestrained powerful managers who could make decisions in their own personal interest. On the other hand, corporations, with their immense social and political power extending far beyond the local communities of the past, were encouraged to contribute to the public good as in the past.

For much of the 20th century, the generally prevailing view was first, to trust managers to run corporations professionally—i.e., shareholders need not worry about inefficiency or unethical behaviour and second, to trust managers to have a sense of responsibility toward other stakeholders, including customers, employees, and society in generation.

This optimistic managerial view was challenged by the social and economic turmoil of the 1970s, which led to increased calls for corporations to use their power and financial resources to help address social problems. Into the fray stepped Milton Friedman, who argued corporate managers had a responsibility to their bosses, the owners of the corporation (i.e., shareholders) and not to society at large.

A series of corporate scandals and a wave of hostile takeovers solidified the shareholder interests’ position, which called for more rigorous governance by shareholders. Passage of the ERISA pension fund law, which increased the influence of institutional shareholders, and seminal legislation, such as Dodd-Frank and Sarbanes-Oxley, that included corporate governance reforms to protect and support shareholders

In sum, the cultural, legal, and institutional environment is skewed toward shareholder interests and shareholder value maximization. Recent arguments and initiatives for greater corporate commitment to social challenges, including The Business Roundtable’s famous 2019 statement on corporate purpose and increasing interest in concepts such as ESG (environmental, social, and governance), reflect an “enlightened” shareholder value approach to corporate purpose, not a fundamental change in the shareholder-centric focus of corporate law and institutions.


Whether developing a purpose statement or reflecting on the overall purpose of the corporation, business leaders will benefit from understanding the often-overlooked duality of the meaning of “corporate purpose.” At the level of their business, leaders indeed have full flexibility in identifying a firm-specific corporate purpose that can encompass the needs of all stakeholders, from employees and customers to society at large. Leaders must be aware, however, that at the broader conceptual level of corporate purpose, cultural, institutional, and legal factors will direct them to focus on shareholder interests.



Dorothy S. Lund’s profile at Columbia Law School


Elizabeth Pollman’s profile at the University of Pennsylvania Carey Law School


Corporate Purpose. Dorothy S. Lund, Elizabeth Pollman. Institute for Law and Economics Research Paper No. 23-28 In Oxford Handbook of Corporate Law and Governance, 2nd ed. European Corporate Governance Institute – Law Working Paper No. 711/2023 (9 June 2023).

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Idea conceived

October 12, 2023

Idea posted

Nov 2023
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