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E-MailJill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Carey Law School and Jeff Schwartz is the Hugh B. Brown Presidential Professor of Law at the University of Utah S.J. Quinney College of Law. This post is based on their recent article, forthcoming in the University of Virginia Law Review.
Corporate values are having a moment. Once implicit and largely invisible, they now sit at the center of corporate decision-making—shaping how firms hire, market, invest, and even speak. Consumers boycott, employees mobilize, and governments respond, all based on perceived alignment (or misalignment) between corporate conduct and societal values. In this environment, corporate values can make or break a company. Yet despite their growing prominence, a fundamental question remains unresolved: what role should values play in the corporation? In our article, Corporate Value(s) (forthcoming University of Virginia Law Review), we offer a framework for answering that question—one that reconciles the increasing importance of values with the enduring centrality of economic value.
Corporations today operate in a world where nearly every business decision carries values implications. Choices about supply chains, hiring practices, environmental impact, and political engagement all communicate something about what a firm stands for. Even routine operational decisions—whether to source ethically, reduce emissions, or expand into controversial markets—are now read through a values lens. At the same time, corporations are increasingly expected to take public positions on social and political issues. This phenomenon, which we have described as “political posturing,” reflects pressure from employees, consumers, and activists, as well as competitive dynamics amplified by social media.
The risks to corporations of values-based positioning are substantial. A misguided values decision can generate backlash from multiple directions—customers, regulators, or investors—and the consequences can be swift and severe. High-profile examples demonstrate that misjudging stakeholder sentiment can lead to lost revenue, reputational harm, and regulatory retaliation. The lesson is not that corporations should avoid values. Rather, it is that values are now inseparable from business strategy—and must be managed accordingly. Toward that end, corporate decision-makers need information both about the values held by their stakeholders and the relationship of those values to economic value.
We argue in this Article that shareholders serve as one critical source of this information. Yet, at the very moment when shareholder input is most valuable, it is increasingly under threat. The shareholder proposal rule—long a central mechanism for communicating shareholder values—is facing regulatory and political backlash. Critics argue that it has become a vehicle for advancing social or political agendas unrelated to firm value. Efforts to restrict or eliminate values-based shareholder proposals are gaining traction. At the same time, asset managers, facing backlash themselves for the exercise of their voting power, are increasingly adopting innovations such as “voting choice” programs that allow investors to select pre-packaged voting policies. While these programs purport to democratize shareholder voice, they offer only crude proxies for investor preferences and risk outsourcing judgment to third parties.
We further challenge framing the debate over value versus values as a binary choice. The impact of any particular values-related choice on firm economic value may be largely unquantifiable, but that does not mean that values decisions are devoid of economic consequences. Similarly, although some values-based decisions are likely to increase or decrease firm economic value, other socially valuable operational decisions are largely uncorrelated with economic value. The challenge is that, while corporate managers lack the legitimacy and the expertise to serve as arbiters of social priorities, they may also lack the information necessary to evaluate the impact of values-based decisions on economic value.
Consequently, rather than being a distraction, shareholder voice should be understood as a critical source of information for managers navigating values-based decisions. We do not argue that managers have a duty to incorporate shareholder or stakeholder values. Rather, in a world where values impact profitability, managers should incorporate such values as appropriate to maximize long-term firm economic value. As Milton Friedman himself recognized, firms may pursue socially oriented actions when doing so advances long-term business interests.
Shareholders today are structurally disadvantaged relative to other stakeholders in their ability to communicate their values-based preferences. Other stakeholders have distinctive tools that enable them to communicate effectively. Consumers signal preferences through purchasing decisions and boycotts. Employees express values through hiring choices, internal advocacy, and attrition. Governments communicate through regulation and enforcement.
Despite being residual claimants with a direct interest in firm value, shareholders face structural barriers to expressing their values. Shareholder-side impediments such as the rise of institutional investing, index funds and intermediation have weakened the traditional channels of communication by shareholders – exit and voice. Corporate-side impediments afford shareholders little or no voice in operational decisions and shield manager judgments with the protection of the business judgment rule.
The challenge is not to eliminate shareholder voice, but to refine it, so as to address legitimate concerns. Toward that end, we argue for preserving the shareholder proposal process, while implementing targeted reforms to address legitimate concerns. These include strengthening limits on overly prescriptive proposals, clarifying relevance standards, and imposing reasonable constraints on repetitive submissions. At the same time, we propose an alternative to voting choice programs: informed intermediation. Under this model, institutional investors would retain voting authority but actively solicit and incorporate input from their beneficiaries. This approach leverages intermediary expertise while ensuring that shareholder values inform corporate governance.
By integrating values into the long-term value maximization framework—and by improving the mechanisms through which shareholders communicate their preferences—corporate governance can adapt to this new reality. Done right, values are not a constraint on corporate success. They are a component of it.
Download the full paper here.
