Re-opening the debate on the Purpose of the Corporation

The maximising shareholder value theory, that came to dominate our thinking and policy-making in last several decades, has been linked, as a causative factor, to the recent financial crises. It has been blamed for some of the worst excesses in corporate behaviour, and academics are now broadly questioning the basic tenets upon which it was built. Policy makers are alive to one of its manifestations, short-termism, and are seeking ways to mitigate that type of thinking. A problem in that regard is that they often simply seek to fix the problem by deploying solutions which serve to further entrench shareholder primacy. They never think to ask the fundamental question: "Does this paradigm actually work?"

The reason that the notion that the purpose of the corporation is to create wealth for shareholders is so problematic is concisely set out in the work of Law Professor, Joel Bakan. Professor Bakan argues that:“Corporations are created by law and imbued with purpose by law. Law dictates what their directors and managers can do, what they cannot do, and what they must do. At least in the United States and other industrialized countries the corporation, as created by law, most closely resembles Milton Friedman’s ideal model of the institution [one in which the only social responsibility of business beyond obeying the law is to increase its profits]: it compels executives to prioritize the interests of their companies and shareholders above all others and forbids them from being socially responsible-at least genuinely so”.[1]

There is now ample evidence that the shareholder value paradigm is flawed economically, legally and socially. What is lacking is a platform for the development of a coherent vision for a new paradigm of corporate governance which will be more beneficial for society than the present one but which will still allow corporations to remain profitable, to provide jobs and innovative solutions to society’s growing needs. In order for such a beneficial paradigm shift to occur in this area there will need to be collaboration between academics (across a number of disciplines), business leaders, policy makers and civil society.

The Environmental Law Service therefore launches the Purpose of the Corporation Project which aims to create a safe and apolitical space for the relevant actors to explore these important issues.

A key challenge, in this process of consideration, will be avoiding the exercise simply dividing along political/ideological lines. The major questions will include:

1. Why we have corporations in the first place. What is it that they are designed to do from a societal point of view?
2. How have the mental models that we use to understand the corporation developed over the years and do they still make sense?
3. How did we get to the current paradigm? What exactly does it entail? Does it still make sense? If not, what are the reasonable alternatives? What are the risks associated with these?
4. How do we ensure that our companies will continue to have access to capital and continue to provide innovative solutions to meet society’s needs? How do we ensure shareholders, and potential shareholders, retain trust in corporations to build wealth, in the new paradigm?
5. How do we balance the necessity for corporations to be profitable with their impacts on society?
6. What do we understand fundamental concepts such as “competitiveness”, “stakeholder”, and “value” to mean in this context?
7. For whom are corporate managers trustees?
8. How might this be reflected in corporate governance provisions and company law?

For more information, please see the attached document.

Endnotes:

[1] Bakan, J. (2005). The Corporation. London: Constable & Robinson. p. 35.