Shareholder Voice and Corporate Purpose

In November 2022, I published an ECGI law working paper (revised May 23) entitled Shareholder Voice and Corporate Purpose: The Purposelessness of Mandatory Corporate Purpose. This doubted the value of a mandatory requirement upon companies to introduce into their constitutions an obligation to pursue social or communal purposes, as well as commercial ones, as suggested by Colin Mayer’s book, Prosperity, and the follow-on British Academy Report, Principles for Purposeful Business. I suggested that, depending on shareholder attitudes towards the goals of investing, such a requirement would (largely) be either ineffective or unnecessary. Colin responded to my arguments in ECGI Law Working Paper 694/2023 (summarized in an OBLB post this month). This is a short rejoinder to that response.

The most salient point which he seeks to make is that my starting point, that Prosperity contemplates a legal obligation on companies to adopt social or communal purposes (as well as commercial ones), is incorrect. Readers of the Preface to and Chapter 7 of Prosperity are probably well placed to reach a conclusion about what a fair reading of those chapters can be taken to state or imply, without any further argument from me, beyond what I say in the body of the paper.

In any event, Colin now asserts that the purpose of Prosperity says should be understood in the following way:

‘While Davies is focused on the front end of determination and adoption of purpose, that is not something of concern to Prosperity, which instead concentrates on the back end of commitment to and implementation of purpose. It is not concerned about the front end because it is not seeking to determine and adopt anything other than purposes which are supported by shareholders, namely profitable solutions for the problems of people and planet’ (p 1).

In the face of the considerable evidence of shareholder reluctance to supplement the financial goals of the company with social or communal ones, this view of what Prosperity is about does substantially reduce the value of the book. Since the adoption of expanded corporate purposes is presented as a major reform, one would expect its advocate to devote attention to the mechanisms and incentives, within and without the law, for companies to adopt such purposes. After all, the principal problem with utopias is not imagining them, but working out how to bring them about—or some approximation of them—which must include, one would have thought, some analysis of the attractiveness of the utopia to those expected to seek it.

In any event, Colin does accept that the British Academy Report, the outcome of a study group which he chaired as a follow-up to the book and of which he was the driving force, does contemplate the imposition of a legal obligation to adopt broader purposes via the company’s articles. So, at a minimum, a legal obligation on companies to adopt broader purposes has been placed on the menu of policy choices as a result of Colin’s activities, and it calls out for critical examination, which is what I have aimed to give it in my paper. Colin identifies certain alleged defects in my arguments, but, again, I leave it to readers to judge whether these defects exist and, to the extent that they do, how important they are.

Colin seeks to explain what he regards as the ‘significant difference’ (p 9) between what Prosperity and the British Academy Report say about mandatory, broad corporate purposes on the grounds that the Academy Report was addressing the additional topic of the ‘negative detriments’ of corporate behaviour, not just the positive benefits of broader corporate purposes. As he puts it: ‘In contrast the British Academy introduces a second element to corporate purposes alongside ‘producing profitable solutions to the problems of people and planet’ and that is ‘not profiting from producing problems for either’ (p 9).

This seems to me a post hoc rationalisation since, on the one hand, mandatory purposes are an incomplete legal response to corporate externalities. They do very little to provide redress to those outside the company who suffer from the company’s behaviour in breach of the purposes. That is the realm of tort law and regulation, not corporate law. Sadly, we know from the recent cases of Oxfam and the United Nations that even organisations with the loftiest goals will on occasion commit abuses. On the other hand, broader purposes, whether voluntary or mandatory, cannot be said to lack all mitigating impact on corporate harms. For example, a company which has adopted voluntarily a purpose of reducing income inequality in society is less likely to lobby government against increasing the national minimum wage than one which has not. So, if Colin’s argument is correct, Prosperity missed a trick by not examining the potential for corporate purposes to mitigate externalities.

However, in my reading, Prosperity did set out to deal with the negative elements of corporate behaviour as well as promoting the production of profitable solutions to the problems of people and the planet. This then explains the limitations of the British Academy’s report. It was not setting out a general prospectus for dealing with corporate externalities, but was rather taking further an issue already raised in Prosperity: how to deploy corporate law to promote the adoption of broad purposes on a mandatory basis where companies were unwilling to adopt them voluntarily. This is, after all, the only proposal to emerge from the ‘Law’ chapter of the Academy’s report (see its Table 1). Liability rules in favour of outsiders, whether directed at the company or its directors, are absent.

Prosperity, in fact, states that it does seek to address externalities. In its first pages (pp 1–2), it lists among the problems the book seeks to fix, that the company ‘is the source of inequality, deprivation and environmental degradation’ and among the questions it seeks to answer is: ‘How can we ensure that we harness business as a source of societal benefits and avoid its detriments’ (emphasis added). Maybe, the answer to the first part of this question is more fully developed in the book than the answer to the second, but the second is clearly put on the agenda of the issues the book sees to address.  

As to the Academy Report, the adoption of broad purposes, whether voluntarily or in the shadow of the law, may be a way of formally binding directors to the company to pursue those purposes, but its practical efficacy in that regard is subject to limits, as a number of legal colleagues have argued. See Marco Ventoruzzo and Klaus Hopt (especially the reasoning supporting his Conclusion 6). The adoption of a purpose by the company in its articles or by board resolution increases directors’ incentives to promote it, but it is not guaranteed to ensure the directors’ commitment to it in all circumstances or to remove from them all discretion in the interpretation of those purposes. The mandatory ‘purpose adoption’ technique will probably need supplementation, for example, through ‘green pills’, as Armour Enriques and Wetzer have argued. I do not explore this issue in this Working Paper, because, as Colin would put it, I am writing about the front end. But it is undoubtedly an important consideration for those writing about the back end.

In short, the front-end/back-end distinction does not undermine my view that a reasonable reader of Prosperity would conclude that it had put on the agenda the issue of using corporate law to require the adoption of broad purposes—even if Colin now asserts that he did not intend this. So perhaps the aims of the book and of the report on this point are not so different after all.

The reader who has waded through my paper, Colin’s response and the above postscript may be a little impatient. After all, none of what I say is designed to belittle the value of companies adopting broad social purposes (as well as commercial ones). I just can’t see that mandatory purpose requirements will get us very far in that direction. And on the particular topic of mandatory purpose requirements, Colin does accept that the British Academy working party which he chaired did propose consideration of this technique. Sub specie aeternitatis does it matter all that much whether this proposal was contained in Colin’s book, his British Academy project, or both? This gives rise to an intriguing question: where does Colin now stand—and where logically ought he to stand—on mandatory broad objects for companies as a mechanism for dealing with externalities? Since his next book, which he trails, focusses on the topic of externalities, presumably we shall find out in due course. I look forward to reading it.

Paul Davies is Emeritus Professor of Corporate Law at the University of Oxford and Senior Research Fellow at Harris Manchester College, Oxford.

This post is part of an OBLB series on the Board-Shareholder Dialogue. Previous OBLB series are available here.

A previous version of this blog post has appeared on the ECGI blog.