The historical cycles of corporate purpose alternating between the dominance of shareholder value or of stakeholder and social interests have ended. Since the 1980s and for the foreseeable future, corporations prioritized shareholder interests which does not eliminate the possibility of stakeholder-friendly initiatives.
Should corporations be focused exclusively on making a profit for shareholders, or given their wide influence and impact on our daily lives, should they have a greater responsibility towards all stakeholders and society at large?
In the United States, this debate over the purpose and responsibilities of business has been ongoing since colonial times. As the debate rages today, one senses a general shift from the Milton Friedman school of shareholder value as the sole purpose of business to a more “stakeholder” approach in which companies accept responsibility for helping to address the challenges and needs of all stakeholders—including society at large. Environmental, social, and business (ESG) governance captures this new mindset of the progressive corporation that looks beyond its own economic interests.
The history of the corporate purpose debate is marked by pendulum swings between the two approaches, including:
For Brian Cheffins of the University of Cambridge and the European Corporate Governance Institute, the cyclical history of the corporate purpose debate has been overstated. In the post-war era of managerial capitalism, for example, companies did not suddenly ignore the importance of making a profit. Nor did Milton Friedman’s 1970 New York Times opinion piece slam the brakes on stakeholder-friendly management; in fact, the 1970s was a heyday of corporate social responsibility. Finally, the era of shareholder-friendly managerial orientation that began with a wave of hostile takeovers in the early 1980s included stakeholder-friendly countertrends, such as the skepticism of shareholder prioritization sparked by the corporate scandals of the 2000s and the dotcom crash.
Cheffins also takes issue with the assumption that the approach to corporate purpose is in the midst of a pendulum swing away from an emphasis on shareholder value to a more stakeholder-friendly and socially involved approach. For example, he notes the weakening of “shareholder stakeholderism,” in which shareholders themselves push companies in a more stakeholder-friendly direction. For instance, shareholder approvals of ESG initiatives are decreasing. Another obstacle to the stakeholder-oriented approach is corporate law, which is based on the concept of shareholder value as the top priority of a business.
Cheffins, however, is not simply disputing the direction in which the pendulum is swinging. He argues that the pendulum has stopped swinging altogether that is, that the series of cycles that characterized the corporate purpose debate has ended.
Although it was not apparent at the time, Cheffins explains that the hostile takeover wave of the 1980s that led to the revitalization of shareholder primacy was a critical juncture. Based on evolutionary theory, critical junctures are characterized by short, sudden, and significant bursts of change that interrupt or “punctuate” long periods of undisturbed status quo (or “equilibrium”). Critical junctures are characterized both by the brevity of their occurrence and by the long-lasting change that emerges from them.
How did this critical juncture occur? According to Cheffins, the features of corporate law that favour shareholderism were already on the books before the 1980s. However, during the post-war managerial capitalism era, strong managers maintained control over weakly motivated shareholders. That dynamic was reversed as a result of the hostile takeover wave. This new shareholder motivation to monitor the power of managers and focus on shareholder value thus merged with corporate law, which had already entrenched the prioritization of shareholder interests. The result is that shareholder interests above all else are the priority of a corporation’s purpose for the foreseeable future.
Cheffins’ proposal that the 1980s marked the end of the alternating cycles that previously characterized the history of corporations might temper the potential actions from both sides of the debate.
Proponents of stakeholder-friendly corporate purpose could recognize that any trend towards a broader corporate purpose beyond shareholder value will only go so far. Black Rock, for example, has pulled back some support from ESG initiatives because they did not consider the disruption to the firm.
Proponents of shareholder-friendly corporate purpose, on the other hand, might move away (if they have not already done so) from the absolutism of Friedman to a more conciliatory position that recognizes to some extent the social responsibilities of business.
In short, whatever approach you favour, the time to end the corporate purpose “debate” and start the corporate purpose “negotiation” that recognizes the legitimacy of both positions may have arrived.
Brian Cheffins’s profile at Cambridge Faculty of Law
The Past, Present, and Future of Corporate Purpose. Brian R. Cheffins Working Paper N° 713/2023. University of Cambridge Faculty of Law Research Paper No. 15/2023. June 2023
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