In a time of climate change, racial and economic inequality, and crisis stemming from the global pandemic, corporations are alternately maligned for their conduct and embraced as a solution for change. Observers have increasingly excoriated the traditional view of corporate purpose—that corporations should be managed for the benefit of shareholders and, specifically, to maximize shareholder wealth—as contributing to societal problems.
Spurred by this debate, and only two decades after prominent scholars announced “the end of history” in favor of shareholder primacy,
luminaries in the field are again asking these central questions of corporate law: For whom is the corporation managed?
Do fiduciaries owe a duty to maximize shareholder value or may they prioritize the interests of other stakeholders?
We contribute to this important debate by enlarging the aperture. Specifically, we provide an original descriptive account of the “corporate governance machine”—a complex governance system in the United States composed of law, institutions, and culture that orients corporate decisionmaking toward shareholders. We describe the key players in the system and show how the machine powerfully drives corporate behavior and influences corporate regulation.
In so doing, we make three primary contributions. First, we provide a holistic account of the contemporary U.S. corporate governance infrastructure and show how it solidifies corporate purpose as promoting shareholder interests. Although legal academics have generally focused on corporate law as a key determinant of purpose, our analysis reveals that this element may well be the least important: A vast array of institutional players—proxy advisors, stock exchanges, ratings agencies, institutional investors, and associations—enshrine shareholder primacy in public markets.
Indeed, we show the very concept of corporate governance promoted by these players developed alongside the principal-agent model of the corporation, such that “good governance” is often equated with minimizing agency costs in the pursuit of shareholder value.
Professional education, the media, and politics further reinforce this cultural understanding.
We also explore examples that demonstrate the machine’s influence over important aspects of public company governance. Corporate social responsibility, for example, was once framed in moral terms as a goal for management irrespective of profit.
But after several decades of circulation within the machine, the idea of corporate social responsibility has been largely replaced with investor-driven environmental, social, and governance (ESG). Today many companies pursue ESG goals, and many investors favor ESG funds, not for moral reasons or a prosocial willingness to sacrifice profits, but because ESG is thought to provide sustainable long-term value or higher risk-adjusted returns for shareholders.
This reframing has in turn shaped managerial decisionmaking about the kinds of ESG activity in which corporations should engage. As the corporate governance machine transformed corporate social responsibility into value-enhancing ESG, it has also pushed social purpose beyond this framing into an entirely different form of corporation—the benefit corporation—which we show is also driven by shareholders and their values.
Second, we look to the consequences of the corporate governance machine’s workings and posit that its shareholderist orientation is potentially suboptimal. When shareholderism is locked into rules, norms, and power structures, superior governance arrangements from a social welfare perspective may be discouraged or taken off the table.
From convergence on one-size-fits-all governance “best practices” to reduced corporate governance innovation, we identify a range of negative implications for corporate law and governance wrought by this system.
Third, and finally, this “meta” account of the U.S. corporate governance system elucidates much about the path of corporate governance reform and the success of the stakeholder governance movement in particular. At the outset, we show how over the past several decades, law, institutions, and culture have entrenched a shareholder-oriented view in corporate law and governance. Battles over the allocation of power within the corporation occur on policy issues such as proxy access and shareholder proposals, but the larger war has been won. We predict that legal reform and soft law standards will continue to be filtered through this lens, and stakeholder-oriented reforms that are framed as benefitting shareholders will have a chance of survival and indeed, be increasingly embraced. As evidence, recall that the ESG movement took off when it was framed in terms of shareholder value. Consider, too, the evolution in corporate purpose away from share price maximization and toward “long-term shareholder value” or even “shareholder welfare” maximization.
In many ways, these developments soften the hard edges of shareholder primacy, but this evolution is itself a legacy of the corporate governance machine: Those who wish to change corporate decisionmaking are forced to do so within the bounds of shareholderism.
What does this mean for the future of corporate governance? On the one hand, absent a large shock to the system, such as a major federal intervention that would force multiple institutional gatekeepers to change their orientation,
the corporate governance machine will likely impede a true paradigm shift away from shareholderism. On the other hand, our account reveals how incremental change could take place. As shifts in understanding regarding the merits of various ESG initiatives occur through cultural and market forces, the promotion of stakeholder interests can be reconciled with pursuing long-term shareholder value. For example, institutional investors and asset managers that hold diversified portfolios increasingly recognize the financial benefits of mitigating climate change risk.
Likewise, corporate sustainability initiatives can protect undiversified investors against downside risk.
To the extent that ESG metrics become easier to measure and disclose, more of such activity might occur and a greater number of investors might support it. Notably, however, this future change is likely to occur through the existing shareholderist model, which limits acceptable rationales and favors activity that can be reduced to measurable metrics tied to risk or financial value.
Part I traces the historical and intellectual underpinnings of corporate governance and charts its rise alongside the shareholder primacy movement. Part II provides an original descriptive account of the U.S. system of corporate governance and its components, showing how law, institutions, and culture enmesh shareholderism at public corporations. Part III explores how the corporate governance machine works using three examples. It describes how the machine has transformed public company boards, shaped the shift from corporate social responsibility to investor-driven ESG, and led to the development of a new form of business organization—the benefit corporation. Part IV examines the broader implications of this analysis for the debate about corporate purpose and other pressing debates in corporate law. It concludes with predictions about the future of corporate governance.