The Rhetoric and Reality of Shareholder Profit Maximization

The corporate purpose debate pits shareholder profit maximization (SPM) against stakeholderism: Corporations should only serve the financial interests of their shareholders versus corporations should also serve the interests of other stakeholders.  Other stakeholder interests prominently include environmental, social, and governance (ESG) interests. In a new paper, I address this debate and argue that real-world SPM, as distinguished from idealized SPM, cannot claim instrumental superiority over stakeholderism, and that the distinction between SPM and stakeholderism is significantly overstated.

The two sides differ as to first principles--the force of the 'should.' This is a difficult gap to bridge, given that the sides’ differences reflect deep views about what government, and institutional and individual actors, can and should do, as well as background facts about the extent and importance of unaddressed social problems.  Are government actors largely well-motivated and competent professionals, or are they largely corrupt, inefficient, or both? How well do markets work? To what extent do people 'get what they deserve,' or are institutions and circumstances significantly responsible for people’s bad economic situations? To what extent can and should communities 'look after their own?' Finally, how much discrimination is there in hiring, promotion, and firing? How bad is climate change anyway? A person’s answer to these questions will influence what they think corporations can and should do as to interests other than shareholders’ financial interests--and why.

SPM proponents also claim that SPM is instrumentally superior--that it guides boards in how to do their jobs and provides accountability if they do not. Yet, even under SPM, corporations must take into consideration other stakeholders’ interests to a far greater degree than is acknowledged. How much profit a firm makes is affected by present or anticipated lawsuits, regulatory scrutiny, regulatory disfavor, shareholder pressure, effects on reputation, and possible changes in law or regulation, including as these reflect or relate to other stakeholders’ interests. Taking other stakeholders’ interests into account 'for the corporation’s sake' rather than for the interest holders’ sake is a difference that does not warrant the chasm that the debate assumes.

Of course, the attention paid to other stakeholders’ interests on account of SPM will not map cleanly onto what many--probably most--stakeholderists would want.  The 'win-win' scenario where something that is, for instance, good for the environment is also good for the bottom line is not apt to straightforwardly justify nearly as much, or the sort of, ESG investment as most ESG proponents think is desirable.  But judgments as to desirability turn on merit, and assessments of merit in this context need to be comparative, given that there are far more such interests than there are resources to further them.  While sufficient small-scale consensus can sometimes be reached – x climate concern is critical and must be addressed – there is no principled way of achieving sufficient understanding or consensus as to which of the many other ESG concerns should be addressed, and how.  An SPM approach can have felicitous effects in, for instance, motivating arguments that might sway policymakers or those in a position to impose reputational costs.  Of course, a shortcoming of this approach is that it rewards cost-imposition, notably the ability to so impose costs 'strategically.' Consider Disney, the Florida government, and the third parties that have effectively weighed in on important social issues (notably, gay and transgender rights) through corporate actions and private and public litigation and pressure campaigns.  The costs are significant, but ultimately, actors from many realms are weighing in and making their best case to the various important audiences, including Disney.

Consider the recent example of the Washington Post’s non-endorsement of Kamala Harris. In the week preceding the presidential election, the newspaper, which was reportedly prepared to print such an endorsement, refrained from doing so. The reaction was immediate and quite negative: The Washington Post lost 10 percent of its subscribers and several editorial board members and top staffers.   The Post is owned by Jeff Bezos.  In an op-ed, he gave a principled reason for the non-endorsement, saying that presidential endorsements 'create the perception  of bias.' The general sense, though, was that Bezos was kowtowing to Donald Trump: An endorsement of Harris would likely have caused the government to punish 'his' company, Amazon.  But, while Bezos founded Amazon, remains as a director and officer, and still owns more of it than anyone else, his share is only a bit more than 10 percent.

What did the other 90 percent of the Amazon shareholders want Bezos to do? Maybe they favored not antagonizing Trump; maybe they opposed the non-endorsement and thought that Amazon’s customers would take out their anger on Amazon; maybe they thought that, regardless of the effect on Amazon’s bottom line, a Washington Post endorsement of Harris was the right thing to do.  Or maybe they didn’t see a connection between a Washington Post endorsement or non-endorsement and their Amazon stockholding.  There continue, of course, to be many influences on Amazon’s stock price; its trajectory has not been such that the market can be said to have delivered a strong verdict, although the evidence is most compatible with some market approval.

In my paper, I conclude by suggesting a rhetorical rapprochement, identifying rationales consistent with SPM that take into account changes in the natural, social, and technological world as well as society’s evolving mores – and could appeal to both SPM and stakeholder proponents. Stakeholder voices cannot be silenced, and the debate between SPM and stakeholderism is real. But the rhetoric may be more at odds than the practice needs to be.

 Claire A. Hill is Professor at the University of Minnesota Law School.

The paper is available here.

A version of this post appeared first on Columbia Law School's Blue Sky blog.