This paper examines the shareholder primacy norm (SPN) as a widely acknowledged impediment to corporate social responsibility and explores the role of business schools in promoting the SPN but also potentially as an avenue for change by addressing misconceptions about shareholder primacy and the purpose of business. We start by explaining the SPN and then review its status under US and UK laws and show that it is not a likely legal requirement, at least under the guise of shareholder value maximization. This is in contrast to the common assertion that managers are legally constrained from addressing CSR issues if doing so is inconsistent with the economic interests of shareholders. Nonetheless, while the SPN might be muted as a legal norm, we show that it is certainly evident as a social norm among managers and in business schools—reflective, in part, of the sole voting rights of shareholders on corporate boards and of the dominance of shareholder theory—and justifiably so in the view of many managers and business academics. We argue that this view is misguided, not least when associated with claims of a purported legally enforceable requirement to maximize shareholder value. We propose two ways by which the influence of the SPN among managers might be attenuated: extending fiduciary duties of executives to non-shareholder stakeholders and changes in business school teaching such that it covers a plurality of conceptions of the purpose of the corporation.
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“Occupy Wall Street is a diffuse group of activists who say they stand against corporate greed, social inequality and the corrosive power of major banks and multinational corporations over the democratic process” (see New York Times: http://topics.nytimes.com/top/reference/timestopics/organizations/o/occupy_wall_street/index.html and http://occupywallst.org/about/ (accessed 29 April 2013).
This was further reinforced in 1993 by a congressional change to the US tax code that capped the tax deductibility of top management compensation not qualified as “performance based” (primarily interpreted as profitability). The purpose was to limit executive compensation perceived as being “excessive,” although research suggests that the law has had little effect on executive compensation in practice (Rose and Wolfram 2002).
That managers believe that the SPN is legally enforceable might be interpreted as something more than a social norm. Although legal action against corporate management for breaching the SPN is unlikely to be successful, the threat of such action might act as a reinforcement of the SPN. This does not make the SPN a legal norm as such a managerial belief is based on a misinterpretation of the law. However, this misinterpretation reinforces the SPN as a social norm because managers believe that they are legally required to follow the SPN.
Long ago, Berle and Means (1932) argued that shareholders of public corporations with dispersed shareholdings had lost their de facto control to corporate managers because of diluted voting power. More recent times have seen a return of more concentrated voting power of shareholders based primarily on three developments: (1) Since the days of Berle and Means, the composition of ownership on the stock market has shifted from a majority ownership by individual shareholders to a majority ownership of institutional shareholders (Davis 2008; Blume and Keim 2012), which has led to more effective voting power when a greater concentration of a corporation’s shares are held by an institution. (2) The rise of Institutional Shareholder Services (ISS), which is a proxy advisory firm for institutional investors advising how they should vote with their shares as well as often voting on their behalf. ISS dominates the market for such services, and its rise has led to a greater concentration of shareholder voting power. (3) In 2010, the Securities and Exchange Commission (SEC) introduced a “proxy access” rule designed to make it easier for shareholders to get their own nominees onto corporate boards (although a Federal Appeals Court has since blocked the rule, the SEC has yet to revive it).
This suggestion does not so much solve the problem as avoid it. For example, it implies that employees, who have a stake in the corporation qua employees, should become shareholders so that they can have their interests as employees considered qua shareholders. Also, there is no reason why employees’ ability to obtain stock stands in any proportion to their stake qua employees.
German corporate law provides employees with board representation for corporations above a certain size (number of employees). This is made possible because employees are easily identifiable individuals, while other stakeholder groups with more transactional relationships with the corporations do not lend themselves to such easy and relevant identification.
Clark has drafted all of the benefit corporation legislations enacted or introduced, at least till the publication of this article.
Clark and Babson (2012, pp. 839–840) provide the California legislation by way of illustration, observing thus: “The directors of benefit corporations, in considering the best interests of the corporation, [S]hall consider the effects of any action or decision not to act on: (1) The stockholders of the benefit corporation; (2) The employees and workforce of the benefit corporation and the subsidiaries and suppliers of the benefit corporation; (3) The interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation; (4) Community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or the subsidiaries or suppliers of the benefit corporation are located; and (5) The local and global environment….”
However, under current legislation, benefit corporations are not required to have their benefit report certified or audited by a third party (Clark and Babson 2012).
Source is the B-Lab website: http://www.benefitcorp.net/find-a-benefit-corp (accessed 6 October 2014).
Patagonia is privately held. Its founders chose B-corp status to protect its commitment to a social mission, recognizing that this could not be assured as the business passed to future generations even with constituency statutes. Alterrus Systems Inc., an urban farming company, claimed in March 2013 to be the first publicly listed company to earn B-corp certification; see: http://www.csrwire.com/press_releases/35379-Alterrus-Becomes-First-Publicly-Listed-Company-To-Earn-B-Corp-Certification-Indicating-Its-Commitment-To-A-Better-Way-Of-Growing (accessed 6 October 2014).
See: http://mbaoath.org/ (accessed 10 June 2013).
A Harvard Business Review debate site on the role of business schools in the crisis attracted over 30,000 visitors with 67 % of respondents to its (unscientific) survey claiming that business schools were at least partly responsible for the ethical and strategic lapses of their graduates (Harvard Business Review 2009).
Removing the voting rights for shareholders would remove the SPN, as it would put shareholders on an equal footing with other stakeholders who likewise lack the right to vote. Under such circumstances, all stakeholders are equal as the only avenue for any stakeholder to make enforceable demands on the board would be through the courts. However, such a system may be unfeasible due to practical difficulties and undesirable consequences. First, it may be slow and expensive to use the courts as a central system of corporate governance. Second, without any voters, it is unclear how any board would be elected. Third, it is likely that the corporate legal form would fall out of favor with investors if the act of incorporation meant that they thereby lost a measure of control over the corporation.
Passive influence primarily involves abstaining from investing in certain stock based on ethical criteria, while active influence involves engaging corporations to change their behavior.
Some corporate leaders may not wish to wait for the evolution of mindful shareholders in order to get a clear mandate to address stakeholder concerns. To this end, it is possible for corporations to influence the composition of its shareholders. For example, as we have mentioned, in order to be able to take a long-term view of its business, Unilever has informed Hedge Funds that they are not welcome as shareholders. But there are many other strategies. Edward Rock (2012) discusses at length “recruitment” and “shaping” strategies that corporations can employ to recruit desirable shareholders and shape existing shareholders to become more desirable. Examples of recruitment strategies include the issuing of preferred stock to desirable shareholders as well as active investment relations management. Shaping strategies include the choice of corporate domicile (because different jurisdictions attract different types of shareholders), as well as providing a system of Tenured Voting whereby shares that are held longer receive greater voting power.
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Research support for this project from Dreyfus Sons & Co. Ltd., Banquiers is gratefully acknowledged.
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Smith, N.C., Rönnegard, D. Shareholder Primacy, Corporate Social Responsibility, and the Role of Business Schools. J Bus Ethics 134, 463–478 (2016). https://doi.org/10.1007/s10551-014-2427-x
- Corporate social responsibility
- Shareholder primacy
- Shareholder value maximization
- Business schools
- Corporate law
- Fiduciary duties
- Benefit corporations