Bridge over ocean
1 October 2016 CFA Institute Journal Review

Shareholder Primacy, Corporate Social Responsibility, and the Role of Business Schools (Digest Summary)

  1. Marc L. Ross, CFA

Business schools have long promoted the dominance of shareholder value maximization but could be agents of change by teaching students about corporate responsibility to other stakeholders.

What’s Inside?

Shareholder primacy—not a legal requirement but a social norm—seeks to maximize the interests of shareholders over those of any socially responsible mission. The authors consider how the corporation might embrace a wider responsibility that addresses multiple interests, including those of nonshareholder stakeholders, as well as the role of business schools in affording students additional perspectives on the role of the corporation.

How Is This Research Useful to Practitioners?

Long held as management’s fiduciary obligation to make corporate decisions that maximize the corporation’s value to shareholders, the shareholder primacy norm has underpinned company leadership in the service of this mission. Both common and statutory law have informed and shaped corporate law to fulfill what management has considered a company’s primary duty to its shareholders.

Managerial fiduciary duties have sought to protect shareholder interests, eschewing any obstacles to them. Management has understood shareholder value maximization to be a requirement of statutory rather than common law, but it is a development of the latter. The structure of corporate law that extends voting rights solely to shareholders has led corporations to rely on the shareholder primacy norm. It is not enforceable, but it guides management’s fiduciary duties of loyalty and care to the company’s shareholders.

Numerous legal enactments and the business judgment rule allow managers to take into account a wider group of stakeholders. Moreover, state constituency statutes permit management to consider nonshareholder interests, as does the American Law Institute’s Principles of the Law—Corporate Governance: Analysis and Recommendations.

Business schools bear substantial responsibility for teaching their students the supremacy of shareholder interests, a theme that may often inform students’ conduct when they enter the business world and seek leadership positions where their compensation is linked to company share price. A core business school topic—the principal–agent model of the corporation—describes managers acting as agents in the service of shareholders (or principals) entitled to residual claims of a firm’s financial returns (i.e., share value). The pervasiveness of shareholder primacy was manifest in the Great Recession. Widening the tent to include such alternative perspectives on the corporation as stakeholder theory and social contract theory would serve future corporate leadership well and promote greater social awareness.

Changes that promote more socially responsible corporate governance have come, albeit slowly. Giving voting rights to nonshareholder stakeholders is fraught with challenges that range from properly identifying such relevant stakeholders to determining whether each individual within a stakeholder organization may vote and how to weigh stakeholders’ votes. A solution that has gained more traction is the B Corporation, a standard that certifies a company’s adherence to social and environmental responsibility in its conduct of business. Enacted through legislation in more than 20 US states, the B Corporation is bound by a fiduciary duty to consider the interests of nonshareholder stakeholders but does not extend voting rights to them.

Shareholder activists, behavioral finance economists, financial educators, and business school faculty and leadership might consider the benefits of viewing a corporate mission that goes beyond the pursuit of profit to encompass a wider and more compassionate mission.

How Did the Authors Conduct This Research?

The authors study a body of literature on the role of the corporation. Their research also considers how common law and statutory law influence corporate law to serve shareholder interests. Scholarship on the corporation’s raison d’être, media reports, and analyses of alternative perspectives on corporate governance all inform the authors’ perspective. Legislative change and revision of the business school curriculum to encompass a broader perspective on the role of the corporation could serve society and its future leadership well.

Abstractor’s Viewpoint

Long considered the primary, if not sole, purpose of the corporation, maximization of shareholder value to the exclusion of any social mandate has not always gone as planned.

Nevertheless, business educators need to consider how today’s corporation can do well while doing good. In a brave new world that values social consciousness, corporate social responsibility and the pursuit of profit need not be mutually exclusive.

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