So Long to Shareholder Primacy

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

In a press release issued [August 19, 2019], the Business Roundtable announced the adoption of a new Statement on the Purpose of a Corporation, signed by 181 well-known, high-powered CEOs. What’s newsworthy here is that the Statement “moves away from shareholder primacy” as a guiding principle and outlines in its place a “modern standard for corporate responsibility” that makes a commitment to all stakeholders. Yup, that Business Roundtable. According to the press release, the Business Roundtable has had a long-standing practice of issuing Principles of Corporate Governance. Since 1997, those Principles have advocated the theory of “shareholder primacy—that corporations exist principally to serve shareholders”—and relegated the interests of any other stakeholders to positions that were strictly “derivative of the duty to stockholders.” The new Statement supersedes previous statements and “more accurately reflects [the Business Roundtable’s] commitment to a free market economy that serves all Americans. This statement represents only one element of Business Roundtable’s work to ensure more inclusive prosperity, and we are continuing to challenge ourselves to do more.” Fasten your seatbelts, disciples of Milton Friedman; it’s going to be a bumpy night.


Shareholder primacy was not always the prevalent theory, argues Professor William Lazonick in “Profits without Prosperity,” published in the September 2014 Harvard Business Review:

“From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what [he calls] ‘sustainable prosperity.’ This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality.” [emphasis added]. (See this PubCo post.)

The shift to shareholder primacy has been widely attributed to the development of the “shareholder preeminence theory” by the Chicago school of economists, beginning in the 1970s, with economist Milton Friedman famously arguing that the only “social responsibility of business is to increase its profits.” Subsequently, two other economists published a paper characterizing shareholders as “‘principals’ who hired executives and board members as ‘agents.’ In other words, when you are an executive or corporate director, you work for the shareholders.” (See this PubCo post.)

According to Jamie Dimon, Chair of the Business Roundtable and CEO of JPMorgan Chase, “The American dream is alive, but fraying….Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.” The former CEO of Vanguard, also quoted in the press release, welcomed “this thoughtful statement by Business Roundtable CEOs on the Purpose of a Corporation. By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone—investors, employees, communities, suppliers and customers.” According to the WSJ, seven CEOs declined to sign the Statement, and the Council of Institutional Investors also opposed the Statement, contending that it “gives CEOs cover to dodge shareholder oversight.”

Reproduced below is the new Statement from the Business Roundtable:

“Statement on the Purpose of a Corporation

Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

  • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

As noted in this article from Fortune, the “new statement is 300 words long, and shareholders aren’t mentioned until word 250.” According to the author, the shift in perspective is “the result of a yearlong reexamination that began with a testy dinner attended by a group of journalistic critics and involving a comprehensive survey of CEOs, academics, NGOs, and political leaders.” These discussions raised a fundamental question about “how well capitalism is serving society.”

That question may have its origins in the 2008 financial crisis, which “shook the foundations of the sprawling market economy and bared some of its uglier consequences: an enormous and widening gulf between the über-rich and the working poor, between the ample rewards of capital and the stagnating wages of labor, between the protected few and the vulnerable many. Compounding these inequities, moreover, was a sweep of disruptive business technologies that began to come of age in the wake of the crisis—from digitization to robotics to A.I.—and that made vulnerable workers feel ever more so.” The crisis triggered a strong reaction against the system of capitalism in some quarters, especially among the younger generation.


That widening gulf might be reflected in this new report from the Economic Policy Institute, which showed that, from “1978 to 2018, CEO compensation grew by 1,007.5% [valued based on when options granted] (940.3% under the options-realized measure), far outstripping S&P stock market growth (706.7%) and the wage growth of very high earners (339.2%). In contrast, wages for the typical worker grew by just 11.9%.

In December 2016, the article continues,

Fortune assembled roughly 100 big-company CEOs in Rome, at the encouragement of Pope Francis, and spent a day in working-group deliberations on how the private sector could address global social problems. The group…proposed ways that business could help reach the billions of people in the world who lacked basic financial services; support the effort to fight climate change; expand training programs for those whose jobs were threatened by technological change; and provide basic community health services to the half-billion people who had no access to care…. But the backdrop for the conversation…was never far from mind—and remains so today: More and more CEOs worry that public support for the system in which they’ve operated is in danger of disappearing.”

The authors suggests that the Business Roundtable’s new perspective has been driven by a shift in public sentiment—“as many Americans (64%) say that a company’s ‘primary purpose’ should include ‘making the world better’ as say it should include ‘making money for shareholders’”—as well as pressure from employees, especially younger workers.


A broader view of “corporate purpose has been advocated for several years now by Laurence Fink, the Chair and CEO of BlackRock and one of the signatories to the new Business Roundtable Statement. Governments, in Fink’s view, have not been up to the task, with the result that “society increasingly is turning to the private sector and asking that companies respond to broader societal challenges…. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” [Emphasis added.] What does that mean in practice? According to Fink, among other things, a company should consider its role in the community, its management of its environmental impact, its efforts to create a diverse workforce, its ability to adapt to technological change and take advantage of new opportunities, its retraining programs for employees in an increasingly automated world and its efforts to help prepare workers for retirement. But these goals are not just goals in and of themselves; they have a larger purpose. (See this PubCo post.)

According to a poll conducted by Fortune in March, 41% of Fortune 500 CEOs agreed that “solving social problems should be ‘part of [their] core business strategy.’ (Seven percent, it’s worth noting, still stick to the Friedman view that they should ‘mainly focus on making profits and not be distracted by social goals.’)” CEOs and others were coining new terms such as “compassionate capitalism” and “inclusive capitalism”—as the author phrased it: capitalism “was desperately in need of a modifier.”

Needless to say, some are skeptical of the change in corporate attitude and see it as, perhaps, just a kind of virtue-signaling. The article cites, for example, Anand Giridharadas, author of the book Winners Take All: The Elite Charade of Changing the World, who told the article’s author that he could

“‘absolutely see the change….It has become socially unacceptable as a company or a rich person not to be doing good. CEOs are asking the question: ‘What can I do to make the world better?’ But what many are failing to do is ask: ‘What have I done that may be drowning out any of the do-gooding I’m doing?’ He cites the 2017 tax bill, supported by the Business Roundtable, as an example. The lion’s share of the benefits, he argues, ended up in the hands of the top 1%, increasing the income inequality underlying many social problems. ‘What I see are well-meaning activities that are virtuous side hustles,…while key activities of their business are relatively undisturbed … Many of the companies are focused on doing more good but less attentive to doing less harm.’”

Nevertheless, the article’s author maintains, with government in a state of paralysis, “the new social consciousness of business surely should be seen as a step in the right direction,” with business leadership “filling the leadership vacuum.”


One hiccup might be the legal doctrine currently prevalent in the Delaware courts. In this 2015 article, The Dangers of Denial, Delaware Chief Justice Leo Strine wrote:

“In current corporate law scholarship, there is a tendency among those who believe that corporations should be more socially responsible to avoid the more difficult and important task of advocating for externality regulation of corporations in a globalizing economy and encouraging institutional investors to exercise their power as stockholders responsibly. Instead, these advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance within the limits of their legal discretion, under the law of the most important American jurisdiction—Delaware. I say stockholder welfare for a reason. To the extent that these commentators argue that directors are generally empowered to manage the corporation in a way that is not dictated by what will best maximize the corporation’s current stock price, they are correct. But their claim, as I understand it, is a more fundamental one: they contend that directors may subordinate what they believe is best for stockholder welfare to other interests, such as those of the company’s workers or society generally. That is, they do not argue simply that directors may choose to forsake a higher short-term profit if they believe that course of action will best advance the interests of stockholders in the long run. Rather, these commentators argue that directors have no legal obligation to make—within the constraints of other positive law—the promotion of stockholder welfare their end. According to these commentators, if only corporate directors recognized that the stockholders are just one of many ends they can legally pursue, the world would be a better place….Despite attempts to muddy the doctrinal waters, a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare.”

But for another view, see, “The Central Role of Political Myth in Corporate Law,” in which a Yale professor argues that, in light of the strength of the business judgment rule (and in the absence of conflicts of interest), shareholder wealth maximization as a legal tenet is really just a myth: “the law does not require that managers maximize shareholder wealth”; rather, “market forces, as distinct from legal duties, appear to be forcing managers of public companies to single-mindedly pursue the goal of wealth maximization.” In the author’s view, the

“reality is that directors essentially can do whatever they want (subject to the subterfuge condition and the qualification that directors refrain from actively damaging shareholders’ interests)….As many others have observed, understanding the nature and function of the business judgment rule is the key to understanding why the notion of shareholder wealth maximization is a norm and not an enforceable legal principle. Unless directors are actually stealing from the corporation, in order to be actionable, conduct that ostensibly constitutes a failure to maximize profits for shareholders must be shown to violate the fiduciary duty of care. The business judgment rule is a strong evidentiary presumption that whenever a decision of directors is challenged as being inconsistent with the requirement of shareholder wealth maximization, the defendants are entitled to a strong presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company….Judges go to such great lengths to defer to directors decisions that the shareholder wealth maximization norm is for all intents and purposes a complete nullity.”

As a myth, he suggests, it’s function is more a normative one.

And now the norm is changing. So the question that is teed up by the Statement is this:  what will all of these companies actually do to fulfill the commitments set forth in the Statement?

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