The Evolution of Corporate Purpose

Debates regarding corporate purpose are long-standing, with conflicting visions extending dating back decades. The controversy has intensified recently due to concerns that if corporate America does not forsake prioritizing shareholder interests, social and economic stability could be undermined and the fate of the planet could be jeopardized due to climate change. A by-product of debate thus far is an extensive and rapidly growing literature on corporate purpose, and the closely related topic of corporate stakeholders. A recent paper of mine, ‘The Past, Present and Future of Corporate Purpose’, makes an original contribution to the discourse by focusing on a topic that has only rarely been addressed in a systematic fashion: the future of corporate purpose.

Amidst the ongoing intense debate on corporate purpose, various observers have argued, largely as asides, that ‘shareholder primacy’ is losing its grip on corporate America. A stakeholder-friendly approach supposedly beckons. My paper canvasses potential corporate purpose trajectories, drawing heavily on history in so doing, and predicts no such changing of the guard is imminent.

Legal academics typically refrain from systematically analyzing patterns of change with law. Still, there is a general, if largely implicit, consensus that law, and legally related concepts, evolve. To the extent that law does evolve, there are two obvious potential paths, namely slow and steady change and ‘punctuated equilibrium’—long periods of stasis followed by brief periods of rapid change. In the punctuated equilibrium scenario, what is referred to as critical juncture theory provides valuable guidance on why sudden change happens. Critical junctures have three key features: 1) a fixed period of time when there is ‘structural fluidity’ and ‘heightened contingency’, 2) the window of opportunity for substantial change is brief, 3) change occurs that lasts (path dependence).

With evolution-related versions of change, an implicit assumption is that what is to come differs from the past and the present. However, a cyclical conception of social change involving patterns of alternation is one of the oldest in the history of thought. Cyclical theory can be characterized as pessimistic because it implies a repetitive inevitability. Advocates of a cyclical trajectory resist adopting a mechanistic approach, however, maintaining instead the possibility of repetitions and pendulum swings in social and historical processes merits serious consideration.

The historical summary of corporate purpose trends my paper offers fits with a cyclical narrative. The configuration of corporate law in the 19th century tilted corporate purpose in a public-regarding direction. In the early 20th century evolving share ownership patterns and corporate law revisions opened the way for a shareholder-friendly reorientation that case law jurisprudence underpinned (eg, Dodge v Ford Motor Company (1919)). There then was a swing back, in the form of a mid-20th century ‘managerial capitalism’ era where public company executives reputedly exercised corporate power in a socially responsible manner that involved balancing the interests of key corporate constituencies. Finally, in the late 20th century, there was the most recent swing of the corporate purpose pendulum, prompted by a wave of hostile takeovers in the 1980s that drove home the significance of shareholders’ voting power. The ensuing shareholder primacy era was locked in by executive pay changes designed to make executives rich if they delivered strong results for stockholders.

With shareholder primacy having set the tone in corporate America since the 1980s, a cyclical pattern implies that a broader, stakeholder-oriented conception of corporate purpose will take hold in the not-too-distant future. This tallies with current speculation about management priorities. COVID-19 did much to set the scene for a potential stakeholder-friendly shift. As the 2020s got underway, the pandemic provided an exogenous shock that accelerated pro-stakeholder trends that might have otherwise left shareholder centrality largely undisturbed. These include concerns about climate change and racism.

As to why corporations have been put on the spot with socially charged issues, this has been due to a belief that companies can fill a vacuum left by ineffective government. Business leaders reputedly inspire more trust than politicians, fuelled by a belief that public officials, riddled by gridlock, are incapable of getting a handle on pressing societal problems.

Won’t stockholders object to a pendulum swing away from shareholder primacy? Not necessarily. Client pressure and the possibility of charging higher fees for funds with an environmental, social and governance (ESG) orientation gives asset managers acting on behalf of investors potentially strong incentives to adopt an ESG focus that potentially aligns well with a stakeholder approach.

What about corporate law as an obstacle to a corporate purpose shift? Some observers suggest US corporate law obliges boards to run their companies in the interests of stockholders. In fact, no state corporation code imposes an explicit duty on directors to prioritize shareholders or any other corporate constituency.

While neither shareholders nor corporate law will necessarily foreclose a corporate purpose pendulum swing, both could in fact be stumbling blocks. There are, for instance, shareholder-friendly facets of US corporate law that could hinder a corporate purpose shift toward stakeholders. Most notably, only shareholders get to elect directors, bring derivative suits, and vote on corporate transactions and amendments to the corporate constitution.

If a pro-stakeholder orientation takes hold amongst shareholders, these corporate law features could potentially begin to operate in a stakeholder-friendly manner. In fact, it seems unlikely that there will be a fully-fledged shareholder-led reorientation of corporate purpose in favour of stakeholders. Powerful institutional investors seemingly favourably disposed toward ‘shareholders stakeholderism’ have expressed second thoughts, citing their fiduciary duty to maximize risk-adjusted returns for clients. Growing confusion about what qualifies as ESG-friendly has also hindered the ESG movement. Finally, a recent stock market slump could, if it is sustained, deliver an additional blow since investors may increasingly forsake fee-heavy ESG funds with returns going in reverse.

If shareholders don’t reorient managerial priorities, corporate law reform will probably be required for this to happen. That type of reform is unlikely, however. Over the past century, major US corporate law changes have occurred mainly at the federal level. In particular, there have been three legislative ‘critical junctures’ prompted by a combination of a prolonged, pronounced stock market slump and substantial public antipathy toward business: the introduction of federal securities law in the 1930s, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010. This combination of conditions, however, is quite rare and is not satisfied at present. Also, none of the critical junctures that yielded federally-oriented changes to corporate law involved stakeholder-friendly initiatives. Past patterns, therefore, indicate that the enactment of legislation intended to foster a decisive corporate purpose shift is unlikely.

To the extent that the foregoing assessment of the trajectory of corporate purpose is correct, the news will be disappointing for many of those disillusioned with the current state of capitalism. What is next for those convinced that reform must happen? They likely need to focus on public officials, and need to look beyond corporate law in so doing. Serious doubts exist about the ability of politicians to address the myriad challenges that face society currently, but the fact remains that a stakeholder-friendly swing of the corporate purpose pendulum is unlikely, whether prompted by shareholders or by changes to corporate law.

Brian R Cheffins is Professor of Corporate Law at the University of Cambridge.