Varieties of Shareholderism: Three Views of the Corporate Purpose Cathedral

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya. This post is based on a chapter in the forthcoming Research Handbook on Corporate Purpose and Personhood. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

The perpetual debate over the objective, or purpose, of the corporation shows no signs of abating. The most recent additions to this discourse leverage the disruption wrought by the Covid-19 pandemic to propound claims for or against (but usually for) stakeholderism—namely, a stakeholder-oriented corporate governance. The World Economic Forum has thus endorsed Stakeholder Principles in the COVID Era, about which it declared that the “first priority is to win the war against coronavirus” and committed to “continue to embody ‘stakeholder capitalism’”. These calls come on the heels of the Business Roundtable’s 2019 Statement on the Purpose of a Corporation, in which prominent corporate leaders proclaimed “a fundamental commitment to all of our stakeholders.”

Against this backdrop, this Chapter seeks to make three modest contributions by offering three views of the corporate purpose cathedral that bear on the role of law in it. These views underscore the difference and the tension between an individual perspective and a societal or national legal perspective to the purpose of the corporation.

To those who are familiar with the earlier rounds of this debate, the views propounded now, energized as they are by the Covid-19 emergency circumstances, are modestly novel. They all revolve around the question whether it is good—in different meanings of goodness—to have regular business companies managed with a single focus on shareholder interest or with multiple foci on the interests of multiple stakeholders. Crucially, commentators from all angles of this debate often point to the law as a key mechanism in engendering the outcome they argue about.

After a brief introduction to the structural aspects of shareholderism and stakeholderism, the Chapter first reviews a novel dataset on national legal shareholderism—namely, the degree to which national corporate laws endorse shareholder primacy. Constructed in a joint study with Renée Adams, this measure is the first to address the comparative aspect of legal shareholderism directly by polling legal experts about it. Next, the Chapter reviews research that anchors these two archetypal approaches in personal human values. It is this connection with the fundamental conceptions of the desirable that everybody harbors, which animates attitudes and choices in this context. The upshot is potentially subversive: Legal injunctions to directors on corporate purpose might be an exercise in futility. Directors appear to be able to rationalize to themselves virtually any strategic decision impinging on stakeholder interests that is consistent with their personal values and thus appears to them as the right thing to do, likely without perceiving it as defying applicable positive law.

Finally, I highlight the importance of acknowledging tensions between the two levels of analysis by looking at the works of prominent writers. Adolf Berle, Victor Brudney, and Leo Strine, Jr. have been careful to keep this distinction in mind, which has enabled them to hold multiple views of the cathedral without losing sight of it.

Specifically, I argue that Berle’s famous “concession” to Dodd in the 1950s and his later backtracking from it are better understood in light of the difference between his view on the limits of corporate law due to its roots in the fiduciary loyalty model (national-level shareholderism) and his personal preferences regarding the proper treatment of other stakeholders. Unlike Dodd, however, Berle did not stop at the doctrinal impasse. Effectuating his stakeholderist convictions, Berle became FDR’s aide in designing New Deal reforms outside of core corporate law.

Brudney, too, has acknowledged that corporate law on fiduciary duties cannot come to the rescue of stakeholders. Pointing to board composition regulation as a means for affecting corporate purpose in addition to conduct rules, Brudney called for a structural reform under which non-shareholder stakeholders—in principle, any type of claimants—get to be represented on the board.

Much like a modern-era Berle, Strine demonstrates the bifurcation of corporate purpose regulation in the separation he has kept between his doctrinal analyses and policy proposals. Strine, however, goes beyond both Brudney and Berle in proposing implementable structural measures at the board level as well as pushing the existing doctrinal envelope by leveraging Caremark duties to promote stakeholder interests.

The complete chapter is available for download here.

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