Mark J. Roe is David Berg Professor of Business Law at Harvard Law School. This post is based on his recent paper. 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); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
The large American corporation faces ever-rising pressure to pursue a purpose that is more than just for shareholder profit. This rising pressure interacts with sharp changes in industrial organization in a way that ought to be further analyzed and considered: at the same time that purpose pressure has been increasing, firms’ capacity to accommodate pressure for a wider purpose is rising as well.
I begin this paper by contrasting classical corporate purpose—shareholder primacy—with the wider purpose sought today. I then ask: In principle, is purpose pressure more likely to succeed in a competitive industry or a non-competitive one?
Once we see that accommodating a nonprofitable purpose in a competitive market faces more hurdles than in a noncompetitive one, I then explore the extent to which the facts-on-the-ground match the expected relationship. I start with the evidence of decreasing competition and then turn to the evidence that stakeholders do better in markets where competition is weak. More profitable firms share profits with stakeholders and are more socially responsible than less profitable firms.
