Faculty of law blogs / UNIVERSITY OF OXFORD

Firm Value vs Social Value: The Law and Ethics of Corporate Purpose


Guido Ferrarini
Emeritus Professor of Business Law at the University of Genoa, an Academic Member at the EUSFiL and a Fellow and Research Member at the ECGI


Time to read

3 Minutes

Businesses have long generated serious adverse impacts on the environment and society, in addition to creating wealth for their owners and economic benefits for their key stakeholders. The time has come to rebalance the costs and benefits of business activities more decisively by focusing on their social costs at home and abroad. Two core questions need to be answered. One is how to reduce firms’ negative impacts on people and the planet, while substantially preserving corporate profitability which is essential to the functioning of market economies. The other is what role regulation should play in coordinating corporate actions and reduce adverse impacts.

The first question is often dealt with under the heading of corporate purpose and is analysed from multiple perspectives including finance, law, and organizational psychology. As I argue in a new paper an edited version of which will appear in The Cambridge Handbook of EU Sustainable Finance: Regulation, Supervision and Governance edited by Kern Alexander, Michele Siri and Matteo Gargantini (Cambridge University Press, forthcoming 2023), firms are socially responsible not only to generate profits, but also to promote the interests of their key stakeholders. Therefore, their purpose should extend beyond corporate profits to include the social benefits of corporations. However, the trade-offs between firm value and social value cannot be solved from a purely economic perspective. In my paper, I argue that the economic view of the firm should be complemented by ethics and regulation. The importance of ethics is especially underlined by CSR and stakeholder theory. Moreover, recent management studies emphasize the role of corporate governance in the promotion of social value. The board of directors should identify the ethical and cultural values of the firm and monitor their application at all levels. In addition, organizational purpose should play a fundamental role in the ‘intrinsic’ motivation of people in corporations.

Traditional financial theory promotes the Enlightened Shareholder Value (ESV) approach arguing that firms create social value by taking care of their employees, customers, suppliers, and communities while also increasing their long-term value. Moreover, environmental and social sustainability is increasingly driving change in responsible corporations, while investors and financial institutions exercise pressure on them to comply with ESG requirements. In addition, organizational and technological innovation lead more and more firms to change their business models and organization, enhancing their environmental and social performance while increasing long-term profitability. As a result, corporations generate ‘shared value’ which is key to responsible capitalism. Business ethics complements the financial view of corporations and ethical standards constrain firm value maximization. Consequently, ‘instrumental stakeholderism’ appears too narrow a concept to explain the social orientation of corporate governance. A pluralist approach to the firm is to some extent justified, as shown by Edmans in his ‘Pieconomics’, but should not replace profit as the fundamental corporate goal in a capitalist system.

However, we should not expect corporations to save the world in the absence of public regulation, as argued to the contrary by Colin Mayer. Rather, states and international organizations should coordinate their regulatory efforts, in addition to providing financial resources and incentives to promote sustainability. Regulation is key to induce firms to internalize negative externalities, and international soft law is important to coordinate national regulations and corporate action towards sustainability. New types of standards are emerging such as those on corporate sustainability due diligence which require firms to adopt reasonable measures and reduce adverse impacts. International soft law on corporate due diligence should further contribute to the design of corporate purpose and its orientation towards sustainability.

Once corporate sustainability due diligence is recognized by EU law, following the imminent approval of the proposed Directive, specific obligations will arise for companies which will impact their governance and could become a source of public sanctions and civil liability, albeit within the complex and uncertain regulatory framework vividly depicted by Klaus Hopt in a recent paper. The orientation of corporate purpose towards sustainability will be reinforced by the regulation of environmental and human rights externalities and by the due diligence obligations deriving from them. Once more, the question of corporate profitability should be carefully considered in the design and supervision of the new regulatory framework, given that internalization of adverse impacts by firms will have an impact on their profits. The concept of due diligence may serve this purpose, to the extent that the adoption of ‘reasonable measures’ to prevent or reduce corporate externalities should depend on the economic and financial sustainability of the firm.

Guido Ferrarini is Emeritus Professor of Business Law at the University of Genoa.


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