Corporate Purpose in Play: The Role of ESG Investing

On August 19, 2019, the U.S. Business Roundtable (BR), comprising the CEOs of more than 200 of America’s largest corporations, issued a new mission statement on “the purpose of a corporation” (BR, 2019a). The press release noted that each periodic update on principles of corporate governance since 1997 had endorsed the principle of maximizing shareholder value. In contrast, the new statement commits signatory CEOs “to lead their companies for the benefit of all stakeholders—customers, employees, suppliers, communities and shareholders.” “[Milton] Friedman must be turning in his grave,” a Fortune magazine article declared.

Such shifts are not unprecedented. Indeed, Friedman bore significant intellectual responsibility for the last one. William Allen, a highly regarded former Chancellor of the Delaware Court of Chancery, authored an essay some years ago entitled “Our Schizophrenic Conception of the Business Corporation.” Allen’s thesis was that over the course of the twentieth century there were two quite different and inconsistent ways to conceptualize the public corporation and legitimate its power. I will call them the property conception and the social entity conception.” By the property conception he meant that the corporation is literally seen—in the literature and in the courts—as the property of the individuals who constitute the firm. That made perfect sense, Allen affirmed, when the main players actually were a limited number of natural persons who had come together for the purpose of capital formation. It began to make less sense, he states, as the scale and scope of the modern corporation grew massively, requiring distinctive management skills and risk sharing through widely dispersed stock holdings.

What Allen called the social entity conception of the corporation became the predominant form around the time of the New Deal, a time of socio-economic crisis. Contributors of capital certainly needed to be assured a decent rate of return to induce them to invest in a company. “But the corporation has other purposes of perhaps equal dignity: the satisfaction of consumer wants, the provision of meaningful employment opportunities, and the making of a contribution to the public life of its communities.” This conception prevailed well into the post-World War II era. By the 1980s, however, Allen saw the United States reverting to the property conception. Friedman, already in his famous 1970 New York Times Magazine article, had equated shareholders with business “owners,” and considered directors as well as executives as the owners’ employees. This binary differentiation subsequently became the basis for part ideology and part academic paradigm in the form of principal-agent theory. Allen attributed its broader uptake in the 1980s to innovations in the technology of stock trading, the pressure of growing competition from globalization, and the upsurge of leveraged corporate takeovers. In 1986, a Delaware court held (in Revlon v. MacAndrews & Forbes) that once a firm was already on the auction block, its directors had the fiduciary duty to secure the highest share price available. The generalized shareholder primacy doctrine emerged from this mix. By 2001 it was heralded to be nothing less than “The End of History for Corporate Law.” It became a staple in shaping business school training, corporate law teaching, and securities regulation.

So, should we consider the BR’s mission statement as schizophrenia redux? As an attempt to preempt left-of-center politicians? A significant normative departure in the direction of a “stakeholder theory” of the firm? Unnecessary, because most of those companies already take stakeholder concerns into consideration, and even under Delaware law they have the discretionary power to do so given the “business judgment rule”? Or, as IBM CEO Ginni Rometty put it, is it a means for business to regain its “social license to operate” in the post financial crisis world?

Of course, at this point no one can know how or even if the idea of “repurposing” the corporation will shape actual day-to-day business conduct. But it seems safe to conjecture that, whatever the immediate motivations for the BR statement may have been in, the move toward a more social entity conception of the public corporation that it implies will be reinforced by the remarkable rise of ESG investing—taking into account a company’s environmental, social and governance policies in making investment decisions. This paper examines how and why ESG investing has that potential.

The complete paper is available here.