Beware of the Panacea of Stakeholder-friendly Corporate Purposes
As of the time of this post, we are fighting an unprecedented battle against the Covid-19 pandemic. Its enormous human, political, social and economic costs dramatically call our attention to the concrete relevance of Corporate Social Responsibility (‘CSR’). In particular, now is the time to consider the role of corporate actors with respect to environmental issues and protection of employees, customers and suppliers.
In this short essay, which summarizes a talk I gave at a recent conference in Milan, Italy, I take issue with the relevance and effectiveness of ’corporate purpose’ as a form of private ordering (eg, as a bylaws provision), or in other sources of soft-law (self-regulation in corporate governance codes, declarations of business associations, etc). I challenge whether these are, in fact, effective tools to induce greater commitment toward stakeholders.
This discussion is prompted by a noted book by Colin Mayer, professor of management at Oxford and former dean of the Saïd Business School, entitled ‘Prosperity: Better Business Makes the Greater Good’ (Oxford University Press, 2018). The book, which is as ambitious as its title promises, includes a strong indictment against Western capitalism and, specifically, points its finger at ‘shareholder value’ theories and similar approaches as the wrong model.
Mayer’s pages are replete with interesting ideas, issues, anecdotes and recipes intended to curb the excesses of what is seen as a poisonous and self-destructive corporate culture and to promote a transformation toward a more ethical and sustainable entrepreneurial model. Most of Mayer’s points are well taken and provocative and I must immediately clarify that I personally agree with the desirability of greater corporate social responsibility. I have no doubts that this is not only morally right, but also necessary to contain very real risks and potentially beneficial for the bottom line.
My possible disagreement with Mayer and other similar approaches and initiatives—or, more precisely, with a possible reading of these approaches and initiatives—lays in the excessive trust and emphasis that has been reserved to formulas concerning the purpose of the corporation and their possible consequences. Mayer argues that the corporate contract should include a reference to stakeholders and general social interests beyond value for shareholders, suggesting that this simple trick would have a meaningful impact on business conduct.
From a legal standpoint, this and similar ideas or the expectations they might raise are wrong and potentially dangerous.
Examples of similar approaches abound. Environmental, social and governance (ESG) criteria and sustainability have become mainstream in the last few years, almost a nouvelle vague in both academic and corporate circles, and an industry has developed around them. Even if they take different forms and use different tools, the common denominator in all similar ideas is the use of general formulas to steer directors and executives toward a more ‘humane’ form of capitalism. Just to mention a few examples, consider the growing number of statutes allowing the incorporation of ‘benefit’ corporations or other business organizations to pursue simultaneously both profit and non-profit goals. Or take the shift of many corporate governance codes away from ‘shareholders’ value’ as the main purpose of the corporation: the 2020 version of the Italian corporate governance code is a case in point, with its emphasis on ‘sustainable success’ as the North star of the board. Finally, consider the hype generated by the Business Roundtable Statement on the Purpose of the Corporation issued by 181 CEOs, suggesting a renewed commitment to stakeholders but arguably only old wine in a (not so) new bottle, as also discussed in this post by Luca Enriques. Of course, on top of these examples there are also ‘stakeholder statutes’ indicating, among directors’ duties or prerogatives in all corporations, the consideration of the interests of stakeholders and the community in general (§172 of the UK Companies Act, which Mayer considers insufficient, is probably the foremost example).
It might be that these formulas have some kind of cultural effect and contribute to foster and make more explicit the tension of the organization toward the greater good, not so differently from a catchy corporate motto or list of key values.
If we look at these efforts from a legal perspective, however, I am very skeptical about their concrete relevance and potential effects. At best they are harmless good intentions, if not empty platitudes; at worst they deceive the public and reduce the urgency of real action with lip service to useful marketing goals.
The reasons are obvious.
First, these formulas are so broad, vague and ephemeral that they cannot possibly represent a compass for corporate action; they cannot provide meaningful guidance for virtually any specific corporate decision that implies a (legitimate) tradeoff between the interests of different stakeholders. Also, as precedents show, these formulas can be used even less to invoke the violation of directors’ duties and their liability. This conclusion is inevitable because the very essence of the agency relationship, the crucial function of a director or executive, is exactly mediating and balancing the different and often conflicting interests that converge on the corporation in an uncertain and evolving scenario. The idea of constraining the necessary discretion of directors within the boundaries of a simple purpose declaration is no better than the idea of writing in the contract with a painter that her work must be a masterpiece. Such an attempted shortcut to real value is self-evidently flawed.
Second, multiplying the goals and interests that directors must or can pursue, if it can have any effect at all, by definition increases their flexibility and discretion and makes it easier to justify, ex ante and ex post, very different choices. Without being cynical, from this perspective it is not surprising that these formulas are often welcomed, if not sponsored, by business associations and interest groups linked to managers, executives and entrenched shareholders.
Third, self-regulation and private ordering are often a way to avoid or delay the adoption of more stringent statutory or regulatory provisions. The former might be more or less effective, but they might also create an illusion of responsibility. The risk of putting too much trust into the beneficial consequences of these formulas is a disregard for more biting mandatory provisions, which may be necessary to avoid externalities and other market failures.
Albeit in a slightly different form and with a new vocabulary, this is an old discussion, as old as corporate law itself. Well before the oft-re-emerging debate between ‘institutionalism’ and ‘contractualism’ in continental Europe, as early as in the fifteenth century books containing advice for merchants would discuss the necessity of an ethical approach to business and balancing profit with respect for clients, creditors, employees, providers and the community: see, for example, this recent reprint of the suggestions of an Italian Renaissance businessman (in Italian). We should welcome the growing attention for ESG and sustainability, the introduction of disclosure obligations concerning these issues and the development of increasingly sophisticated and reliable ways to measure and quantify the environmental and social footprint of business. But we should also be realistic about the importance of announcing a general ‘corporate purpose’, at least in the law in action.
A recent paper by Bebchuk and Tallarita goes so far as to observe that stakeholder governance is not only of little consequence for the stakeholders it purports to protect but prejudicial for shareholders and society at large. This might be too much, but their concerns are well grounded and must be taken seriously exactly because ESG and sustainability are so important.
Marco Ventoruzzo is Professor of Corporate Law at Bocconi University, Milan.
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