Legitimating Corporate Power: Shareholderism versus Stakeholderism

In a recent article in the Oxford Journal of Legal Studies, I employ normative democratic theory to analyse the long-standing and arguably ‘sterile’ debate over corporate purpose. Rather than siding prima facie with either shareholderism or stakeholderism, I explore how each seeks to legitimate corporate power and what their proposed strategies reveal about underlying political commitments. I conclude that neither ultimately meets the standards of democratic legitimacy, although the shortcomings of stakeholderism are more fundamental.

Corporate Legitimacy Beyond Legal Validity

Large corporations shape markets, communities, and the environment in ways that far exceed the boundaries of contract or private ordering. Traditionally, such powers have been legitimised by reference to legal rules sanctioning or authorising corporate activities. The article highlights the limitations of this view and instead adopts a two-dimensional conceptual framework widely used in governance studies. Here, output legitimacyconcerns the quality or efficiency of corporate decision making based on some measure of social welfare, whereas input legitimacy asks whether corporate decisions reflect the preferences of the corporation’s legitimate stakeholders.

The Derivative Legitimacy of Shareholderism

Mainstream shareholderism rests on the agency-cost model. By prioritising shareholder interests, corporations are expected to minimise contracting costs and thus maximise efficiency. Focusing on the assumed profit interest of shareholders as a class, shareholderism makes no meaningful distinction between input and output. If corporate decision makers maximise profit, they fulfil the requirements of both input and output legitimacy; if they diverge, both suffer.

Yet shareholderism claims that maximising shareholder value is also the best way to maximise social welfare. For this to happen, the majoritarian political process must distribute the ‘equity surplus’ in line with appropriately voiced stakeholder preferences, while also effectively policing corporate externalities. The goal of regulation, on this view, is not to make management internalise stakeholder preferences but, as Easterbrook and Fischel put it, to make management behave ‘as if it had the interests of others at heart’.

This derivative model of corporate legitimacy means that shareholderism cannot deliver on its legitimising promise without competitive markets free from monopolies and externalities. Accordingly, shareholderists’ appeals to the legislature have recently become more explicit and elaborate. However, most accounts still fail to address deeper structural constraints, such as corporate political power, which distorts public rule-making, or global capital mobility, which undermines the effectiveness of territorial regulation.

Stakeholderism: Pluralism Without Participation

Stakeholder theories challenge shareholder primacy on versatile grounds. The article groups them into three categories: (i) efficiency-oriented approaches; (ii) mixed approaches combining efficiency and ethics; and (iii) normative approaches grounded in alternative conceptions of social value. Most approaches advocate granting corporate directors considerable discretion to define and pursue some version of the ‘common good’.

Stakeholderism faces two major challenges. In terms of output legitimacy, it is not clear which stakeholder interests count in establishing the ‘common good’, and by what principle should competing interests be balanced. Proposed foundations range from Rawlsian justice to utilitarian happiness, but no unifying normative theory exists. The second challenge concerns accountability. With the exception of certain contractarian models, stakeholder approaches are wary of giving stakeholders voting rights or other forms of formal control over corporations. Instead, they seek to reconcile managerial independence with accountability by relying on procedural remedies such as stakeholder councils, due diligence, or public law inspired principles such as transparency and consultation. These ideas have also been expressed in recent legislation, particularly the EU Corporate Sustainability Due Diligence Directive and the EU Corporate Sustainability Reporting Directive. 

Such measures impose obligations of means, not ends, and fail to address the central question of input legitimacy: what role should affected stakeholders play in determining the purposes that guide corporate power? 

Where Does This Leave Us?

Shareholderists’ insistence that redistributive powers belong to the political process is consistent with welfare-economic reasoning and liberal-democratic principles of delegation. Its main weakness is that it fails to adequately confront the structural reasons why governments fail to regulate corporate externalities effectively.

Stakeholderists, by contrast, appear to co-opt rather than contain corporate power. It is not clear whether this is because they view corporate power and free movement of capital as undesirable structural conditions that are more difficult to change than existing systems of corporate law and governance or because they are essential elements of some unidentified corporatist or other political ideal in which the power of corporations is not reduced so much as made to serve the ‘common good’.

There is no empirical consensus on whether it is more effective to fix corporate externalities and monopoly problems via contracting, taxes, regulation, and other forms of direct government action (shareholderism) than through some complex array of rules, practices, social norms, and values that incentivise corporate leaders to behave pro-socially by using their own best judgment (stakeholderism). In terms of output legitimacy, stakeholderism therefore offers a plausible, if untested, alternative. In terms of input legitimacy, however, stakeholderism clearly falls short. Procedural values such as transparency and consultation offer but a thin basis for corporate legitimacy.

The full paper is available here. 

Heikki Marjosola is an Associate Professor of Financial Law at the Faculty of Law, University of Helsinki.