Growth-Oriented Entrepreneur’s Guide to Entrepreneurship

Purpose

Copyright © 2020 by Alan S. Gutterman. Information about the author, the Sustainable Entrepreneurship Project (seproject.org) and permitted uses of this Work appears at the end of this Work.

1 Purpose

Alan S. Gutterman

Setting the strategy for the corporation obviously requires consensus on the purpose of

the firm, the goals and objectives of the firm’s activities and the parties who are to be the

primary beneficiaries of the firm’s performance. Traditionally, directors were seen as the

agents of the persons and parties that provided the capital necessary for the corporation to

operate—the shareholders—and corporate governance was depicted as the framework for

allocating power between the directors and the shareholders and holding the directors

accountable for the stewardship of the capital provided by investors. While economists

and corporate governance scholars from other disciplines recognized that the governance

framework involved a variety of tools and mechanisms such as contracts, organizational

designs and legislation, the primary question was how to use these tools and mechanisms

in the best way to motivate and guarantee that the managers of the corporation would

deliver a competitive rate of return.1 However, while primacy of shareholder interests

has been the dominant theme of corporate governance, at least in the US, for decades,

there is no doubt that one of the most dynamic and important debates in the corporate

governance arena, as well as in other areas of society, is the proper future purpose of the

corporation. Williams described this debate as follows2:

“Is it ‘simply’ to produce products and services that create economic rents to be

distributed to rights’ holders according to pre-existing contractual, statutory and

(possibly) normative obligations? (Given that close to 70% of new companies

ultimately fail, that task cannot be taken as too simple.) Or does the firm also

have a social obligation to minimize harm to people and the natural environment

in its pursuits of profits, or even a positive duty to promote social welfare beyond

its creation of economic rents? In corporate governance and law, this debate

tracks the competition between a shareholder versus stakeholder view of

directors’ and officers’ fiduciary obligations.”

It is useful to begin the discussion of the future purpose of the corporation by returning to

the origins of the conception of the corporation as first understood under the laws of

Ancient Rome. The word “corporation” is derived from the Latin word corpus for body

and corporations were originally understood to be a body of people authorized to act as

an individual. The first entities that were treated as corporations under Roman law were

cities; however, the concept eventually expanded to include organizations (collegia)

formed for exclusively community or religious purposes such as artisan associations,

religious societies and social clubs formed to provide funerals for members. In addition,

Rome relied heavily on firms called publicani, which were associations of private

1 H. Mathiesen, Managerial Ownership and Finance Performance (Dissertation presented at Copenhagen

Business School, 2002). 2 C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe

(Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 34,

available at http://digitalcommons.osgoode.yorku.ca/scholarly_works/1784.

http://digitalcommons.osgoode.yorku.ca/scholarly_works/1784

Purpose


2 contractors that pooled their resources to bid on and perform contracts relating to tasks

that citizens expected to have performed by the government: construction of public

buildings, temples and aqueducts, collection of taxes and manufacture of arms. There is

evidence that publicani often became permanent companies with numerous investors that

employed thousands of workers spread across the lands controlled by the Roman Empire.

Records also show that publicani were controversial and that their operations were often

fraught with scandal and abuse, eventually leading to their falling out of favor. However,

the corporate form survived in Rome with the establishment of charitable corporations to

provide services and support to large numbers of indigents and corporations to facilitate

joint ownership of real estate and other property, and during the Middle Ages after the

fall of the Roman Empire cities, guilds, monasteries and universities were all chartered as

corporations to fulfill largely public or religious functions.3

The concept of using the corporate form to pool capital and other resources while

providing limited liability to contributors (i.e., investors) began to take hold with

arrangements such as the commenda, a system developed in Eleventh Century Italy that

involved a “passive partner” providing funding for a merchant vessel to be sailed by a

“managing partner” who invested no capital. Once the voyage was completed, the

partners split the profits based on a predetermined formula and while the merchant

assumed all of the risks associated with the voyage and cargo the losses of the passive

partner were limited to the amount of the funding commitment.4 Centuries later,

beginning in the 1600s, the British Crown allowed the formation of “joint-stock”

companies in order to aggregate capital, labor and other resources in a single entity to

take on projects that would be too large for any one person, or even one government. As

an inducement for investors and other participants, the government granted monopolies to

these companies, as was the case with the famous East India Company formed to expand

trade and commerce in India.5 In the early years after the independence of the US, a

federally chartered national bank was used to provide direction and coordination for the

fledgling financial sector and there were proposals, which were rejected, to create

additional federally-sanctioned corporate-like entities to carry out public works projects.

Decades later, the federal government authorized industrial corporations to direct

industry in the construction of the country’s extensive transcontinental railroad system.6

The “private corporation”, as we know it, came along relatively late in the history of

corporations, really beginning to take hold in the late 1800s in the US when state

legislatures began to allow corporations to define the scope of their activities on their

own, without government approval, and provide the owners of those corporations (i.e.,

the shareholders) with limited liability and the ability to aggressive large amounts of

3 G. Holton, History of Corporations (June 12, 2013), https://www.glynholton.com/notes/corporation/

4 R. Hillman, “Limited Liability in Historical Perspective”, Wash. & Lee L. Rev., 54 (1997), 613, 621-624.

5 S. Williston, “History of the Law of Business Corporations before 1800”, Harvard Law Review, 2 (1888),

105, 109. 6 T. Halloran, A Brief History of the Corporate Form and Why It Matters, Fordham Journal of Corporate &

Financial Law (November 8, 2018), https://news.law.fordham.edu/jcfl/2018/11/18/a-brief-history-of-the-

corporate-form-and-why-it-matters/

https://www.glynholton.com/notes/corporation/

https://news.law.fordham.edu/jcfl/2018/11/18/a-brief-history-of-the-corporate-form-and-why-it-matters/


Purpose


3 capital to compete in the marketplace.

7 Not surprisingly, allegations of abuse and

corruption quickly followed and the federal government stepped back in to regulate

privately-owned corporations in a number of ways including through antitrust laws (e.g.,

the Sherman Antitrust Act, which was intended to prevent corporations from achieving

and maintaining monopoly positions by fixing prices and otherwise stifling competition)

and securities laws that mandated transparency regarding corporate operations through

disclosures of audited financial information. Private corporations are a creature of state

law and states continuously regulated the discretion of corporate promoters and other

controlling parties through statutory changes to mandatory corporate governance

procedures such as the scope of the duties of corporate directors and the procedures to be

followed for shareholder consideration and voting on matters relating to the operation of

the corporation. Crucially, the courts have also left their imprint on how corporations are

run and their impact on society, issuing a series of decisions that provided support for the

concept of “shareholder primacy” (i.e., the fiduciary duty of directors is to maximize

shareholder value, thus precluding non-distribution of profits to stockholders and

diversion of those profits for other purposes)8 and holding in the controversial Citizens

United case that the First Amendment allows corporations to use money amassed from

the economic marketplace to fund their political speech.9

This brief history of corporations shows that they have often been used to carry out

important large-scale and risk-intensive projects that promise substantial benefits for

society as a whole and which cannot reasonably be undertaken by individuals acting on

their own or by governments that simply do not have all the resources necessary for

success under their direct control. While the corporate form has often been deployed for

the pursuit of private profits, it is also true that “corporations have been purveyors of

education, civic administration, public works, philanthropy, and spiritual enlightenment

for millennia”.10

At the same time, we have seen that governments have taken

appropriate actions through regulation and the other tools available to them to address

and eliminate abuses of the corporate form and align corporate activities with the pursuit

of social objectives defined by legislators as stewards of the wellbeing of citizens.

Mayer acknowledged and lauded the modern corporation for the expansive role it has

come to play in society:

“The corporation is the creator of wealth, the source of employment, the deliverer

of new technologies, the provider of our needs, the satisfier of our desires, and the

7 H. Wells, “The Modernization of Corporation Law, 1920-1940”, University of Pennsylvania Law

Review, 11.3 (1888), 573, 581. 8 See, e.g., Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1999) (“The discretion of directors . . .

does not extend to . . . the non-distribution of profits among stockholders in order to devote them to other

purposes.”) 9 T. Halloran, A Brief History of the Corporate Form and Why It Matters, Fordham Journal of Corporate &

Financial Law (November 8, 2018), https://news.law.fordham.edu/jcfl/2018/11/18/a-brief-history-of-the-

corporate-form-and-why-it-matters/ See Citizens United v. FEC, 558 U.S. 310, 343 (2010). 10

L. Davoudi, C. McKenna and R. Olegario, “The Historical Role of the Corporation in Society”, Journal

of the British Academy, 6(1) (2018), 19.



Purpose


4 means to our ends. It clothes, feeds, and houses us. It employs us and invests our

savings. It is the source of economic prosperity and growth of nations.”11

In fact, over the past fifty years the corporation has become one of the world’s most

influential institutions and the combined revenues of the world’s 500 largest corporations

were $33.3 trillion in 2019, with the revenues of several of the companies (e.g., Walmart

at $524 billion) being larger than many countries.12

During that time business and

governmental leaders have generally conceived of corporations as being operated with a

single purpose in mind, namely maximizing shareholder value. Profit maximization is

generally associated with the writings of the economist Milton Friedman in the 1960s and

1970s and he also famously dismissed the notion of corporate social responsibility as “a

fundamentally subversive doctrine” promoted as a tool to “spend someone else’s money

for a general social interest”.13

The following passage from his 1970 article in New York

Times Magazine is worth reading in its entirety14

:

"What does it mean to say that the corporate executive has a 'social responsibility'

in his capacity as businessman? If this statement is not pure rhetoric, it must

mean that he is to act in some way that is not in the interest of his employers. For

example, that he is to refrain from increasing the price of the product in order to

contribute to the social objective of preventing inflation, even though a price

increase would be in the best interests of the corporation. Or that he is to make

expenditures on reducing pollution beyond the amount that is in the best interests

of the corporation or that is required by law in order to contribute to the social

objective of improving the environment. Or that, at the expense of corporate

profits, he is to hire ‘hardcore’ unemployed instead of better-qualified available

workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else's

money for a general social interest. Insofar as his actions in accord with his

'social responsibility' reduce returns to stockholders, he is spending their money.

Insofar as his actions raise the price to customers, he is spending the customers'

money. Insofar as his actions lower the wages of some employees, he is spending

their money.

The difficulty of exercising 'social responsibility' illustrates, of course, the great

virtue of private competitive enterprise--it forces people to be responsible for their

own actions and makes it difficult for them to 'exploit' other people for either

selfish or unselfish purposes. They can do good—but only at their own expense."

11

C. Mayer, Prosperity: Better Business Makes the Greater Good (Oxford: Oxford University Press, 2019). 12

Fortune.com/global500/ 13

M. Friedman, The Social Responsibility of Business Is to Increase Its Profits, New York Times

Magazine (September 13, 1970). See also M. Friedman, Capitalism and Freedom (Chicago: University of

Chicago Press, 1962). 14

Id.

Purpose


5 The so-called “Friedman doctrine” was based on the premise that the corporation was the

“property” of its owners, the shareholders, and that directors and corporate executives are

the agents of the shareholders and their actions should be focused on maximizing the

profits available for distribution to the shareholders. Friedman did not invent the concept

that the shareholders were the owners of the corporation; in fact, in the 1930s Berle and

Means analyzed corporations from the perspective of the “private property” rights of

shareholders and argued in The Modern Corporation and Private Property that the

growing “separation of ownership and control” they observed in large business

corporations created serious potential conflicts between the shareholders of those

corporations, who as owners naturally sought corporate profit maximization, and the

corporate managers more interested in entrenching themselves in order to use the broadly

and vaguely defined powers given to them under corporate statutes to further their own

interests.15

As explained by Millon:

“Berle and Means thus pointedly raised the accountability problem that has been

corporate law's central concern ever since: How could shareholders—the

corporation’s ‘owners’—have any assurance that management would act to

maximize shareholders' financial interests? Berle and Means' solution was to

view management's role as that of trustee for the shareholders. The legitimacy of

management's exercise of power of control turned on whether ‘under all the

circumstances the result fairly protects the interests of the shareholders’.”16

In a separate article, Berle made it clear that shareholder wealth maximization should be

the sole focus of corporate management.17

Even earlier, the Michigan Supreme Court’s

1919 decision in Dodge v. Ford Motor Co.18

laid a foundation for the principal that the

managers of a corporation must conduct corporate affairs for the benefit of shareholders

rather than other constituencies.19

In that case, minority shareholders of Ford Motor Co.,

which had been highly profitable and had accumulated a large surplus that the

shareholders believed should be distributed to them, took issue with Henry Ford’s

decision to retain the surplus and divert it “to employ still more men, to spread the

benefits of this industrial system to the greatest possible number, to help them build up

their lives and their homes”. The Court, without citing any precedent, decided that the

capital provided to corporations by shareholders and the profits derived therefrom

belonged to the shareholders and could not be used for purposes other than further

maximizing those profits:

“A business corporation is organized and carried on primarily for the profit of the

shareholders. The powers of the directors are to be employed for that end. The

discretion of directors is to be exercised in the choice of means to attain that end,

15

A. Berle and G. Means, The Modern Corporation and Private Property (Piscataway NJ: Transaction

Publishers, 1932). 16

D. Millon, “Theories of the Corporation”, Duke Law Journal (1990), 201, 221. 17

A. Berle, “For Whom Corporate Managers Are Trustees. A Note”, Harvard Law Review, 45 (1932),

1365. 18

204 Mich. 459, 170 N.W. 668 (1919). 19

D. Millon, “Theories of the Corporation”, Duke Law Journal (1990), 201, 223.

Purpose


6 and does not extend to a change the end itself, to reduction of profits, or to the

non-distribution of profits among stockholders in order to devote them to other

purposes.”20

The Court also made it clear that “it is not within the lawful powers of a board of

directors to shape and conduct the affairs of a corporation for the merely incidental

benefit of shareholders and for the primary purpose of benefiting others”.21

Opponents of the notion that a corporation is the property of its shareholders argue that

under the law corporations have always been recognized as legal entities unto

themselves, vested with authority to exercise privileges granted by the state to carry out

their operations and activities regardless of who formed the corporation, who was

responsible for management of the corporation at a particular time and who the then-

current shareholders were. Corporations have perpetual existence, limited liability and

the ability to assume debt and enter into contracts in their own name, characteristics that

are odds with the notion that corporations should be treated as an extension of those who

provide its capital and thus must be primarily accountable to those shareholders. The

core principle of this so-called “entity theory of corporations” is that they are distinct

entities separate from their constituent elements. Berle and Means posed their theory of

the property rights of shareholders at least partially in response to the arguments of their

contemporary, E. Merrick Dodd, Jr., who wrote extensively about how the “natural

entity” conceptualization of the corporation could be used to provide a theoretical basis

for corporate social responsibility and allowing corporate managers to adopt policies that

benefited constituencies other than shareholders (e.g., employees of the corporation,

consumers of its products, creditors, or communities in which the corporation's plants

were located) and might even reduce profits in certain instances.22

Millon explained that Dodd depended on a novel interpretation of the entity theory to

argue that management’s role was to act as the agent of the corporate as a separate entity

and not to favor the interests of any single group of stakeholders: “If management's role

was to act solely as the agent of the shareholders, the failure to promote shareholder

interests over other competing interests would violate management's fiduciary

responsibility. If, however, management were the agent of a corporate entity distinct

from the shareholder aggregation and that entity were obliged to be a ‘good citizen’, then

management, acting for the corporation, would enjoy the power to discharge the

20

204 Mich. 459, 507; 170 N.W. 668, 684 (1919). 21

Id. While the words of the Michigan Supreme Court are often quoted, Williams pointed out that the

quote was dicta and that the Court ultimately refused to enjoin Ford’s plans, finding them to fall within the

protected scope of the business judgment rule. Williams argued that the opinion of the Court could be cited

as support for the view that “there is great latitude for company directors to act to promote the welfare of

their employees, the communities in which they operate, their customers and suppliers, or even the

environment, but only so long as there is a plausible justification for how that advances the company’s

long-term financial well-being”. C. Williams, “Corporate Social Responsibility and Corporate

Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance

(Oxford: Oxford University Press, 2016), 48, available at

http://digitalcommons.osgoode.yorku.ca/scholarly_works/1784. 22

E. Dodd, “For Whom Are Corporate Managers Trustees?”, Harvard Law Review, 45 (1932), 1145.


Purpose


7 corporation's citizenship responsibilities, even in situations in which the shareholders

might object.”23

Dodd’s conclusion was that corporate managers were trustees for the

corporation, not for its shareholders, and they worked for the corporation and need not be

guided by pure wealth maximization in carrying out their duties as trustees. Dodd

claimed that there was support for his views among corporate managers who believed

that corporations had public obligations to act as a good citizen that should be recognized

and provided the following statement from an officer of General Electric:

“There are three groups of people who have an interest in that institution. One is

the group of fifty-odd thousand people who have put their capital in the company,

namely, its stockholders. Another is a group of well toward one hundred

thousand people who are putting their labor and their lives into the business of the

company. The third group is of customers and the general public.

Customers have a right to demand that a concern so large shall not only do its

business honestly and properly, but, further, that it shall meet its public

obligations and perform its public duties-in a word, vast as it is, that it should be a

good citizen.

Now, I conceive my trust first to be to see to it that the capital which is put

into this concern is safe, honestly and wisely used, and paid a fair rate of return.

Otherwise we cannot get capital. The worker will have no tools.

Second, that the people who put their labor and lives into this concern get fair

wages, continuity of employment, and a recognition of their right to their jobs

where they have educated themselves to highly skilled and specialized work.

Third, that the customers get a product which is as represented and that the

price is such as is consistent with the obligations to the people who put their

capital and labor in.

Last, that the public has a concern functioning in the public interest and

performing its duties as a great and good citizen should.”24

Berle and Means were not necessarily opposed to the idea of corporate social

responsibility that Dodd was promoting and acknowledged that the law might be changed

to make it clear that “the corporate profit 'stream in reality no longer is [the shareholders']

private property, and that claims on it must be adjusted by some test other than that of

23

D. Millon, “Theories of the Corporation”, Duke Law Journal (1990), 201, 217-218. 24

E. Dodd, “For Whom Are Corporate Managers Trustees?”, Harvard Law Review, 45 (1932), 1145, 1154.

Interestingly, while Berle and Means were promoting the need to strengthen protections for shareholders,

many of the largest American corporations operating during the early- and mid-twentieth century could be

characterized as “manageralist”, large conglomerates with strong managers who prioritized stable growth

and passive shareholders who enjoyed a steady stream of dividends but exercised very little authority over

the firm’s operations. See L. Palladino, The American Corporation is in Crisis (October 2, 2019),

http://bostonreview.net/forum/lenore-palladino-american-corporation-crisis%E2%80%94lets-rethink-it


Purpose


8 property right"; however, until that was done, and shareholders effectively gave their

consent to corporate social responsibility by surrendering control over what Berle and

Means still was considered to be the shareholders’ property to management, any

departure from strict attention to the financial interests of shareholders was suspect

because it would be too amorphous; the gains to society would be speculative, but the

losses to shareholders certain.25

Friedman also acknowledged a form of social

responsibility of business; however, he limited it by saying: “there is one and only one

social responsibility of business—to use its resources and engage in activities designed to

increase its profits so long as it stays within the rules of the game, which is to say,

engages in open and free competition without deception or fraud”. Friedman also had

little interest or tolerance for government intervention in the marketplace including how

corporations were operated.

Friedman’s writings have served as a primary source for the theory of shareholder

primacy, the idea that corporations have no higher purpose than maximizing profits for

their shareholders, and it has often seemed that shareholder primacy is treated as

something more than just a theory but rather a natural law of the marketplace.26

As a

matter of corporate law, corporate managers seeking to engage in social responsibility

initiatives that seemed to be at odds with the purely financial interests of shareholders had

to either show that such actions were permitted by statute, which has been difficult until

the recent recognition of “benefit corporations” with clearly different rules regarding the

statutorily mandated fiduciary obligations of the directors, or make an argument which is

steadily gaining traction, namely that pursuing such initiatives is not only good

“corporate citizenship” but also a legitimate means for securing long-term benefits to the

shareholders.27

However, there have always been critics of the potential harms associated

with the concentration of economic power by large corporations and there is a growing

cry to challenge shareholder primacy as being inconsistent with the historical origins of

the corporation and out of step with today’s business environment.

Many on all sides of the debate regarding theories of the corporation explicitly and

implicitly assume that corporate governance and the relationships among corporate

managers, shareholders and other constituencies are private matters to be decided among

those them by contract, market forces or whatever. In other words, government is not to

be too involved, other than as a referee when disputes spill over into the courts.

Moreover, since the functioning of corporations was a private matter, managers had no

legitimate business in involving corporations in addressing societal issues that should be

left to public policy and governmental action. However, as early as the 1950s

commentators were warning that: “The corporate organizations of business have long

ceased to be private phenomena. That they have a direct impact on the social, economic

25

D. Millon, “Theories of the Corporation”, Duke Law Journal (1990), 201, 222 (citing A. Berle and G.

Means, The Modern Corporation and Private Property (Piscataway NJ: Transaction Publishers, 1932), 247

and 355). 26

L. Palladino, The American Corporation is in Crisis (October 2, 2019),

http://bostonreview.net/forum/lenore-palladino-american-corporation-crisis%E2%80%94lets-rethink-it 27

D. Millon, “Theories of the Corporation”, Duke Law Journal (1990), 201, 224.


Purpose


9 and political life of the nation is no longer a matter of argument.”

28 Chayes assigned a

large responsibility for certain negative aspects of the quality and tone of American life to

corporations including “the neglect of basic research, the dilution of the college degree,

the organization man, the dullness and superficiality of the mass media [and] the level of

political morality” and argued for a new socially responsive corporate legal regime that

was dedicated to the public interest and based on an institutional arrangement for the

exercise of corporate power that was “designed to represent the interests of a

constituency of members have a significant common relation to the corporation and its

power”.29

In other words, Chayes promoted the idea that all groups affected by corporate

activity, both inside and outside the corporation and including employees and consumers

as well as shareholders, should be afforded legal rights as “members” of the corporation

to participate in corporate decision making.30

Decades later, in 1979, the president of Quaker Oats Kenneth Mason criticized

Friedman’s “profits-are-everything philosophy” in an article in Business Week as "a

dreary and demeaning view of the role of business and business leaders in our society",

and argued: "Making a profit is no more the purpose of a corporation than getting enough

to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose,

one would hope, is somewhat broader and more challenging. Likewise with business and

profit." Mason then went on to say:

"The moral imperative all of us share in this world is that of getting the best return

we can on whatever assets we are privileged to employ. What American business

leaders too often forget is that this means all the assets employed—not just the

financial assets but also the brains employed, the labor employed, the materials

employed, and the land, air, and water employed."

Mason called for readers to "encourage, not evade, discussion of those problems that

arise when the activities of business conflict with the needs and concerns of society."31

Another line of attack on the notion that the corporation was the “property” of its

shareholders came from advocates of a new economic theory of the corporation that

emerged in the early 1980s, but was grounded in principles first laid out by Ronald Coase

in his writings on the “nature of the firm” in the 1930s.32

According to this theory, as

28

W. Friedmann, “Corporate Power, Governance by Private Groups, and the Law”, Columbia Law Review,

57 (1957), 155, 176. 29

A. Chayes, “The Modern Corporation and the Rule of Law” in E. Mason (Editor), The Corporation and

Modern Society (Cambridge MA: Harvard University Press, 1959), 25, 26-27, 41. 30


Business Week (August 13, 1979) (as quoted in J. Makower, Milton Friedman and the Social

Responsibility of Business (November 24, 2006), https://www.greenbiz.com/article/milton-friedman-and-

social-responsibility-business). 32

R. Coase, “The Nature of the Firm”, Economica (1937), 386 (arguing that firms, such as corporations,

become the preferred method of organizing for production, as opposed to relying on contracts in the

marketplace, when organizing the firm reduces or avoids the transaction costs associated with market

contracts to obtain goods or services (e.g., search and information costs, bargaining costs and policing and

enforcement costs)).

https://www.greenbiz.com/article/milton-friedman-and-social-responsibility-business

https://www.greenbiz.com/article/milton-friedman-and-social-responsibility-business

Purpose


10 explained by Easterbook and Fischel, the corporation is a “complex set of explicit and

implicit contracts”, often referred to as a “nexus of contracts”33

, rather than a delegation

of property from owners (i.e., the shareholders) to their agents (i.e., the directors and

managers of the corporation).34

Under this formulation, shareholders are one of many

suppliers of inputs for the activities of the corporation and their rights, like those of all

the other suppliers, are ultimately determined by negotiation among private parties,

market forces and, to a lesser extent, statutory dictates.35

This “contract model” has interesting consequences for the roles of shareholders and the

activities and duties of management: shareholders are not the owners of the corporation

or the property it uses, but instead are “residual claimants” entitled to whatever is left

when the corporation dissolves after the claims of other constituencies have been

satisfied36

; and “management’s role is simply to oversee the ongoing process of voluntary

negotiation, agreement, and adjustment among the various actors who participate in the

firm’s activities”.37

While corporate managers will presumably be driven by market

forces and incentivized to organize and oversee production in a manner that optimizes the

value of the shareholders’ residual interest in the assets of the corporation, they are no

longer properly referred to as agents of the shareholders and are under no legal or moral

obligation to prioritize the interests of shareholders among all of the firm’s

constituencies.38

However, while the model arguably undermined the notion of

shareholder primacy among all the constituents of the corporation, its reliance on

freedom of contract relating to activities that were purely private matters appeared to

preclude outside intervention due to public policy concerns, such as legal rules that

sought to protect non-shareholders by limiting the shareholders’ contractual freedom.39

33

A. Alchian and H. Demsetz, “Production, Information Costs and Economic Organization”, American

Economic Review, 62(5) (1972), 777. 34

F. Easterbook and D. Fischel, The Economic Structure of Corporate Law (Cambridge MA: Harvard

University Press, 1991), 1-39 (as cited and explained in M. Vargas, “Dodge v. Ford Motor Co. at 100: The

Enduring Legacy of Corporate Law’s Most Controversial Case”, The Business Lawyer, 75 (Summer 2020),

2119). 35

R. Marris, The Economic Theory of Managerial Capitalism (Springer, 1964), 12 (each constituent of the

corporation, including the shareholders, own only a “bundle of rights”). 36


University Press, 1991), 11 (“these equity investors have the ‘residual’ claim in the sense that they get only

what is left over—but they get all of what is left over”). 37



University Press, 1991), 37. 39

D. Millon, “Theories of the Corporation”, Duke Law Journal (1990), 201, 231. For another theory of the

corporation and the nature of corporate law, see R. Anderson, A Property Theory of Corporate Law (June

24, 2020), available at https://ssrn.com/abstract=3421009 (explaining that the “contract model” assumes

that corporate law is merely a specialized branch of contract law and arguing that the corporation should

actually be conceived as a nexus of contractual and proprietary interests, that the distinctive aspects of

corporate law (i.e., fiduciary duty, voting, limited liability, perpetual existence and transferable shares)

concern the proprietary portion of the corporation held by the residual claimants) and that the other

interests in the firm (i.e., the interests of creditors, employees, suppliers and customers) are contractual and

protected by the rules of traditional contract law such as duties of good faith and fair dealing).

https://ssrn.com/abstract=3421009

Purpose


11 In spite of the protestations against the presumption that exclusive goal of corporate

activities was to maximize value for the owners of the corporation (i.e., the shareholders),

history shows that this view was seized upon by investors and CEOs who often used

aggressive tactics to drive up share prices and create large, yet often dysfunctional,

conglomerates. Friedman and others who shared his view maintained that companies did

make a positive social contribution by running a profitable business, employing people,

paying taxes and distributing some part of their net profits to shareholders.40

Another

argument often made for the shareholder primacy approach to corporate governance was

that requiring management to invest time and effort in devising ways to create additional

social benefits beyond the honest pursuit of profits within the boundaries of the law

would dilute management’s focus, undermine economic performance, and thereby

ultimately undermine social welfare.41

Other supporters of the shareholder-oriented

perspective cautioned that corporate responsibility was too much responsibility to impose

on directors and pursuing social policy goals was a task best left to the state and not to

businesses, which should not get themselves involved with political matters. An

additional stated concern about expanding the directors’ power beyond shareholder

interests is that it would undermine director accountability by allowing them to act in

their own self-interest while claiming to act in other constituents’ interests.42

Eventually, other members of the academic community, as well as regulators, politicians,

activists and even some of the investors that had grown wealthy during the stock market

turbulence over the three decades starting with the 1980s, began to question the primacy

of shareholder value and called for rethinking the role of the corporation in society and its

duties to their owners and other parties impacted by their operational activities and

strategic decisions. Among other things, this meant challenging the long-accepted

assumption that the principal participants in the corporate governance framework were

the shareholders, management and board of directors. For example, Sir Adrian Cadbury,

Chair of the UK Commission on Corporate Governance, famously offered the following

description of corporate governance and the governance framework in the Commission’s

1992 Report on the Financial Aspects of Corporate Governance:

“Corporate governance is concerned with holding the balance between economic

and social goals and between individual and communal goals. The governance

framework is there to encourage the efficient use of resources and equally to

require accountability for the stewardship of those resources. The aim is to align

as nearly as possible the interests of individuals, corporations and society.”

40

C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe

(Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 35,

available at http://digitalcommons.osgoode.yorku.ca/scholarly_works/1784. 41

Id. (citing H. Hansmann and R. Kraakman, “The End of History for Corporate Law”, Georgetown Law

Journal, 89 (2001), 439, 442-443). 42

Id. at 36-37 (citing D. Engel, “An Approach to Corporate Social Responsibility”, Stanford Law Review,

32 (1979), 1; D. Fischel, “The Corporate Governance Movement”, Vanderbilt Law Review, 35 (1982),

1259; and S. Bainbridge, “Corporate Social Responsibility in the Night-Watchman State”, Colorado Law

Review Sidebar, 115 (2015), 39, 49).


Purpose


12 Cadbury’s formulation of corporate governance brought an array of other participants,

referred to as “stakeholders”, into the conversation: employees, suppliers, partners,

customers, creditors, auditors, government agencies, the press and the general

community. As described by Goergen and Renneboog: “[a] corporate governance system

is the combination of mechanisms which ensure that the management (the agent) runs the

firm for the benefit of one or several stakeholders (principals). Such stakeholders may

cover shareholders, creditors, suppliers, clients, employees and other parties with whom

the firm conducts its business.”43

The principles of corporate governance of the

Organisation for Economic Cooperation and Development clearly state that the corporate

governance framework should recognize the rights of stakeholders (i.e., employees,

customers, partners and the local community) as established by law and encourage active

co-operation between corporations and stakeholders in creating wealth, jobs, and the

sustainability of financially sound enterprises.

In 2019, Mayer argued for recognition of the contributions of a wide range of

stakeholders to the success of the corporation: “The assets of the firm have been

accumulated on the back of the investments of virtually every segment of society—

employees, suppliers, communities, nations, and nature—on the basis of extensive

privileges and protections deriving from incorporation and limited liability. … The

corporation … uses capital, labor, land, materials, and nature in varying proportions to

produce a dazzling array of things that clothe, feed, house, entertain, and finally bury us.

In other words it is a user of a range of inputs to produce an even greater number of

outputs.”44

A few years earlier, Lazonick argued that the market-based ideology of

“maximizing shareholder value” was destroying the US economy and that innovation

among enterprises required more than just financial capital, but also strategic control and

organizational integration and collaboration among a wide range of participants.45

The

case for shareholder primacy is further undercut by the reality that most shareholders of

publicly held corporations have acquired their shares through trading in the markets

rather than by contributing their capital directly to the asset base of the corporation.

As the 2010s came to a close, an influential movement supported by a diverse range of

stakeholders was calling for a critical reassessment of the social contract between the

corporation and society and changes in the way that business is conducted. For example,

after acknowledging and celebrating the contributions of the corporation as noted above

and affirming his belief that the corporation is an extraordinary institution with the

potential to create remarkable benefits, Mayer went on to caution as follows:

“At the same time, [the corporation] is the source of inequality, deprivation, and

environmental degradation, and the problems are getting worse. They are getting

worse because the corporation is getting bigger to a point where in some cases it

43

M. Goergen and L. Renneboog, “Contractual Corporate Governance”, Journal of Corporate Finance,

14(3) (June 2008), 166. 44

C. Mayer, Prosperity: Better Business Makes the Greater Good (Oxford: Oxford University Press, 2019)

(as reproduced in Prosperity, Colin Meyer – On The Purpose Of Business (January 14, 2019),

https://www.thendobetter.com/investing/2019/1/14/prosperity-colin-mayer-on-the-purpose-of-business). 45

W. Lazonick, Theory of the Innovative Enterprise: A Foundation of Economic Analysis (2013).

Purpose


13 is larger than nation states. And as nations find themselves unable to service their

debt obligations, they turn to corporations to supply the goods and services that

they provided in the past. But is the corporation capable of bearing the

responsibilities that are being placed on its shoulders? The evidence is not

encouraging.”46

In a comprehensive 2019 report on the “Future of the Corporation”, the British Academy

noted that the case for change was based on several critical factors47

:

The global nature of the environmental and social challenges that society faces,

ranging from climate change to all of the issues sought to be addressed by the UN’s

Sustainable Development Goals (“SDGs”), and the global nature and mobility of

business itself, had created systematic risks that have made the corporate and

financial systems upon which the world depends more vulnerable.48

The opportunities and challenges presented by new technology and business models

which have emerged at a rate that has outpaced regulation. New technology would

undoubtedly change the lives of large swathes of society, such as the impact of

artificial intelligence on the future of work, and businesses will likely have little

guidance from lawmakers who are struggling to keep up, which means that they will

need to be able and willing to establish their own standards for governance and

accountability (e.g., reporting) to multiple stakeholders.49

The increasingly intangible nature of companies—leading companies’ assets have

altered from 83% tangible (buildings, plant, machinery) to 87% intangible (brands,

patents, intellectual property)—had exposed the fallacy that shareholders must control

the management of companies in order to protect the use of tangible assets and made

the traditional economic tools of competition policy and regulation obsolete.50

While business was widely regarded as being more trustworthy than governments and

media, the perception of business in wider society remained a significant issue and

businesses must continue to build trust with wider society by assuming accountability

46

C. Mayer, Prosperity: Better Business Makes the Greater Good (Oxford: Oxford University Press, 2019)

(as reproduced in Prosperity, Colin Meyer – On The Purpose Of Business (January 14, 2019),

https://www.thendobetter.com/investing/2019/1/14/prosperity-colin-mayer-on-the-purpose-of-business). 47

Principles for Purposeful Business: How to deliver the framework for the Future of the Corporation (The

British Academy Future of the Corporation, 2019), 12. 48

For example, it has been argued that the global mobility of businesses makes it unlikely that their

excesses can be controlled, or their excess profits harvested for use on environmental and social problems,

through taxation. See M. Desai and D. Dharmapala, “Revisiting the Uneasy Case for Corporate Taxation

in an Uneasy World”, Journal of the British Academy, 6(s1) (2018). 49

See J. Birkinshaw, “How is Technological Change Affecting the Nature of the Corporation?’, Journal of

the British Academy, 6(s1) (2018). For example, research indicates that over 70% of larger companies

refer to the SDGs when reporting on the external impacts of their actions, with the most attention being

paid to Climate Action (SDG 13), Responsible Production and Consumption (SDG 12) and Decent Work

and Economic Growth (SDG 8). See, e.g., Business and the SDGs: A survey of WBCSD members and

Global Network partners (World Business Council for Sustainable Development, 2019),

https://docs.wbcsd.org/2018/07/WBCSD_Business_and_the_SDGs.pdf 50

See “Annual Study of Intangible Asset Market Value” Ocean Tomo LLC (2015),

https://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/

https://docs.wbcsd.org/2018/07/WBCSD_Business_and_the_SDGs.pdf

Purpose


14 for their impact on people and planet regarding social inequality, the environment,

competition, consumer protection and privacy in digital markets.51

Evidence was building to support the argument that pursuit of more sustainable

strategies, or creation of a more diverse workforce, increases profitability and

shareholder value and creates more long-term investment opportunities. In addition,

as companies succeeded in building trust as mentioned above, they could realize the

benefits (including enhanced shareholder value) associated with more loyal

customers, more engaged employees, more reliable suppliers and more supportive

shareholders and societies.52

In a previous report on its research on the “future of the corporation”, The British

Academy argued that it was time to reformulate our understanding of the purpose of the

corporation, discarding the notion that corporations are to be formed and operated solely

for profit in favor of the principle that corporations should focus their attention and

resources on pursuing public purposes that contribute to public interests and societal

goals. Under such a model, profits would not be prohibited; however, they would be a

product of a corporation’s purpose, but not the purpose of the corporation. According to

the report, the new purpose of the modern corporation should be to profitably solve

problems for people and planet, while avoiding profiting from the creation of problems

for people and planet.53

Other influential voices have been coming forward with similar

thoughts. For example, in his “2019 Letter to CEOs” Larry Fink, the CEO and Chairman

of Blackrock, the largest investment management firm in the world, wrote that “every

business needs a purpose [...] Purpose is not the sole pursuit of profits but the animating

force for achieving them.”54

The Business Roundtable issued a statement on the purpose

of the corporation that recognized the vital role that businesses play in the broader

economy by creating jobs, fostering innovation and providing essential goods and

services and affirmed businesses’ fundamental commitments to all of their stakeholders

including creation of long-term value for shareholders.55

The New York Times returned to the words and overriding topics included in Friedman’s

essay 50 years later with a special issue that reproduced the essay along with

commentaries from more than 20 experts—including CEOs, Nobel laureates and other

top thinkers—what Friedman got right and what he got wrong and why. Some of the

experts argued that Friedman had been misunderstood; however, a number of different

types of critiques of his views and the actions of corporations over the years were

51

See N. Kirby, A. Kirton and A. Crean, “Do Corporations have a Duty to be Trustworthy?” Journal of the

British Academy, 6(s1) (2018), 79 and OECD Business and Finance Outlook 2019: Strengthening Trust in

Business (Paris: OECD Publishing, 2019), https://doi.org/10.1787/af784794-en 52

N. Hsieh, B. Lange, D. Rodin and M. Wolf-Bauwens, “Getting Clear on Corporate Culture”, Journal of

the British Academy, 6(s1) (2018). 53

Reforming Business for the 21st century (The British Academy, 2019).

54 “Larry Fink’s 2019 Letter to CEOs”, Available: https://www.blackrock.com/corporate/investor-

relations/larry-fink-ceo-letter 55

Statement on the Purpose of a Corporation (Business Roundtable, 2019),

https://opportunity.businessroundtable.org/ourcommitment/

Purpose


15 offered.

56 Marc Benioff, chief executive of Salesforce, first read Friedman’s essay in the

1980s while he was attending business school and noted: “Friedman’s essay ...

influenced—I’d say brainwashed— a generation of C.E.O.s who believed that the only

business of business is business. … Just look where the obsession with maximizing

profits for shareholders has brought us: terrible economic, racial and health inequalities;

the catastrophe of climate change. It’s no wonder that so many young people now

believe that capitalism can’t deliver the equal, inclusive, sustainable future they want.”

Joseph Stiglitz, professor of economics at Columbia University and a professional

contemporary of Friedman who himself was awarded a Nobel Prize in Economics in

2001, related that: “By the time he wrote this essay, Friedman, who had done

distinguished analytic and empirical work in economics, had become largely a

conservative ideologue. I gave a talk at the University of Chicago around this time,

presenting an early version of my research establishing that in the presence of imperfect

risk markets and incomplete information—that is, always— firms pursuing profit

maximization did not lead to the maximization of societal welfare. ... Friedman simply

couldn’t or wouldn’t accept the result; but neither, of course, could he refute the analysis

— it has been a half-century, and my analysis has stood the test of time. His conclusion,

as influential as it was, has not. Today the downside of Friedman’s perspective is even

darker: Is it Mark Zuckerberg’s social responsibility to allow wanton disinformation to

roam over his social media platform? Is it Zuckerberg’s responsibility to lobby to get rid

of a pesky foreign competitor while fighting for his company to be free from anti-

competitive restraints and any accountability, so long as it increases his bottom line?

Friedman would say yes. Economic theory, common sense and historical experience

suggest otherwise. It is good that the business community has awaked. Now let’s see

whether they practice what they preach.”

Marty Lipton, a senior partner at the widely recognized corporate law firm of Wachtell,

Lipton, Rosen & Katz said: “The most significant part of the Friedman essay was the

headline. For a half-century, that phrase has been used to summarize the essay, and

Friedman’s earlier economic writings, in support of “shareholder primacy” as the bedrock

of American capitalism. The Friedman doctrine precipitated a new era of short-termism,

hostile takeovers, junk-bond financing and the erosion of protections for employees and

the environment to increase corporate profits and maximize value for shareholders. This

version of capitalism was ascendant in the 1980s and continued until the 2008 financial

crisis, when the perils of short-termism were vividly illustrated.”

Glenn Hubbard, professor of economics at Columbia Business School, was among those

more sympathetic to Friedman, noting: “Somewhat unfairly, Friedman’s focus has been

taken to mean “short-term value,” generating gains to benefit current shareholders at the

expense of other stakeholders. But Friedman is best read as embracing maximizing

shareholder value over the long run. Toward that end, short-term gains at the expense of

stakeholders— who might decide not to work for, supply to or buy from the firm—make

56

The quotes below are taken from Greed is Good. Except When It’s Bad. DealBook/The New York Times

Magazine (September 13, 2020).

Purpose


16 little sense. There is another rub, and Friedman anticipated it: Even long-term

shareholder-value maximization can’t address all problems faced by a firm. Some

problems — climate change, for example — are arguably more complex than Friedman

envisioned. In these cases, public policy changes are required.”

Another theme among the commentators was the social license of corporations to

operate. Darren Walker, the chief executive of the Ford Foundation, was critical of

Friedman’s essay in the following way: “Friedman ignored that in a democratic-capitalist

society, democracy must come first. “We, the people” grant businesses their license to

operate — which they, in turn, must earn and renew.” According to Larry Fink, the chief

executive of BlackRock: “[C]ompanies can and must do more to contribute and serve all

of their stakeholders. Companies need to earn their social license to operate every day—

and multinational corporations need to be increasingly local and participate in the

communities where they operate. In today’s world, a greater sense of responsibility from

business is not going to undermine free markets, as Friedman suggests, but is actually

essential to preserving and strengthening them.”

Reflection on Friedman’s essay was also a time for others to raise broader concerns about

the role of corporations and the range of powers they have accumulated in society.

Robert Reich, a professor at Berkeley and a former secretary of labor, said: “In the last

half-century, big corporations have gained so much influence over government that

they’ve overwhelmed our democracy. … Largely because of [a] surge of corporate

money into politics, taxes on corporations have been slashed, safety nets for the poor

have begun to unravel and public investments in education and infrastructure have

waned. … If today’s CEOs were serious about social responsibility, they’d use their

formidable political clout to push for public financing of campaigns and would seek a

constitutional amendment limiting corporate lobbying and campaign spending, so big

corporations could never again become so politically powerful.”

Similarly, Leo E. Strine Jr., a former chief justice of Delaware, and Joey Zwillinger, the

founder and CEO of Allbirds, argued: “To reverse the Friedman paradigm, companies

should embrace an affirmative duty to stakeholders and society. But that’s only half the

battle. Business leaders must support the restoration of fair rules of the game by

government; respect the need for strong and resilient public institutions to govern a

complex society; pay their fair share of taxes; and stop using corporate funds to distort

our nation’s political process.” Ahand Giridharadas, the author of “Winners Take All”,

summed up the consequences of Friedman’s view as follows: “Friedman’s vision could

have worked if companies actually stayed in their lanes, leaving robust public and civic

sectors free to create rules that harness the energies of private enterprise to the maximum

good of all. Instead he gave companies moral cover to be ruthless and not worry about

the public good—while leaving them scot-free to meddle in the public sphere for the sake

of rewriting the rules.”

Another article published in The New York Times Magazine on the same day outlined

some of the important changes in the environment in which big business operates since

the days that the Friedman doctrine and “shareholder primary” took hold. For example,

Purpose


17 the percentage of Americans who have “a great deal” or “quite a lot” of confidence in big

business dipped from 26% in 1973 to 19% in 2020, which the percentage expressing

“very little” to “no” confidence in big business increased from 29% in 1973 to 36% in

2020. At the same time, the percentage of Americans who believe that “big government”

will be the greatest threat to the country in the future doubled from 33% in 1969 to 67%

in 2016. Taken together, these trends beg the question of which institutions will be

trusted to take the lead in addressing major societal and environmental challenges. The

ratio of average CEO compensation to typical workers’ compensation exploded from 24-

to-1 in 1970 to 320-to-1 in 2019. The overwhelming influence of corporations in the

political arena can be predicted from the fact that the ratio of dollars spent on corporate

lobbying for every dollar spent by unions and public interest groups in 2015 was $34-to-

$1. One byproduct of that was that 91 of the Fortune 500 companies pad no federal

income tax in 2018.57

Other attempts have been made to reconcile the fundamental legal principles of

shareholder primacy with the consideration of the interests of other stakeholders in their

deliberations. For example, the landmark March 1986 opinion of the Supreme Court of

Delaware in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. addressed the duty of

directors when a corporation was up for sale or the break-up of the corporation was

inevitable and included the famous statement that “[t]he directors’ role changed from

defenders of the corporate bastion to auctioneers charged with getting the best price for

the stockholders at a sale of the company.”58

Commentators have pointed out, however,

that this rule was adopted, and has been followed, in a very specific scenario--the sale of

the corporation—and that the directors’ duty of loyalty to act in the best interests of the

company and its stockholders does not preclude directors from considering the interests

of other constituencies in determining what is in the company’s and stockholders’ best

interest.59

One of leading law firms on corporate governance issues has championed the

concept of “enlightened” shareholder primacy that allows for-profit corporations formed

under Delaware law (which constitute 60% of the companies on the Fortune 500 list) to

take social issues into account in the conduct of their business as long as the

corporation’s consideration of those issues has a sufficient nexus to shareholder welfare

and value enhancement or protection.60

Stakeholder primary, of “stakeholderism” as it is sometimes called, is still not universally

accepted and support for Friedman’s principles remains, particularly among his disciples

at the University of Chicago who have argued that providing managers with too much

latitude to advance the interests of non-shareholder stakeholders may actually make

57

K. Andersen, “Free Love, Free Minds, Free Markets”, The New York Times Magazine (September 13,

2020), 4. 58

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986). 59

https://www.skadden.com/insights/publications/2020/02/directors-fiduciary-duties. 60

https://www.skadden.com/insights/publications/2019/08/putting-to-rest-the-debate. For more insight, see

https://www.skadden.com/insights/publications/2019/02/social-responsibility-and-enlightened-shareholder;

https://corpgov.law.harvard.edu/2019/08/24/stakeholder-governance-and-the-fiduciary-duties-of-directors/;

https://corpgov.law.harvard.edu/2020/05/27/on-the-purpose-of-the-corporation/; and

https://corpgov.law.harvard.edu/2020/06/04/an-alternative-paradigm-to-on-the-purpose-of-the-corporation/.

https://www.skadden.com/insights/publications/2020/02/directors-fiduciary-duties

https://www.skadden.com/insights/publications/2019/08/putting-to-rest-the-debate

https://www.skadden.com/insights/publications/2019/02/social-responsibility-and-enlightened-shareholder

https://corpgov.law.harvard.edu/2019/08/24/stakeholder-governance-and-the-fiduciary-duties-of-directors/

https://corpgov.law.harvard.edu/2020/05/27/on-the-purpose-of-the-corporation/

https://corpgov.law.harvard.edu/2020/06/04/an-alternative-paradigm-to-on-the-purpose-of-the-corporation/

Purpose


18 things worse for them. An article in The Economist in September 2020 outlined some of

the challenges, beginning with the difficulties in balancing the competing interests of

stakeholders: a shareholder who is also an employee may prefer higher wages even if that

depresses profits and money spent on reducing pollution will not be available to fund

skills training for workers.61

Managers will never be able to reach a consensus on the

contentious political and social issues that were involved when Hobby Lobby denied

contraceptive insurance to its employees on religious grounds or when Nike supported

Colin Kaepernick’s protest against police brutality.

The article also referenced critics of the sincerity of the managers that have publicly

called for a shift in corporate purpose who have found that between 2000 and 2019

bosses did not negotiate for any restrictions on the freedom of the buyer to fire employees

in 95% of sales of public firms to private-equity groups and that many of the companies

that signed on to the Business Roundtable statement on corporate purpose “had failed to

‘walk the talk’” and in fact had spent more on lobbying and had a higher incidence of

environmental and labor compliance violations than their peers from 2016 to 2020. All

of this has caused some to take the position that stakeholderism is nothing more than an

“illusory hope” that will allow politicians and regulators to simply shift responsibility for

important social issues to businesses and abandon their own duties to consider and adopt

laws and policies that can address them, such as tax reform, antitrust regulation and

carbon taxes. They recommend a path based on the retention of shareholder primacy, but

encouraging shareholders to use the tools available to them to push managers to pursue

goals beyond maximization of profit to include broader societal welfare.

The movement toward reforming the purpose of the corporation requires a number of

changes involving multiple actors—lawmakers and regulators, corporate managers,

investors and non-shareholder stakeholders—and fundamental shifts in standard practices

and cultural norms.62

The British Academy proposed eight principles for business

leaders and policymakers that incorporated and described the features of an operating

environment that would enable every business to deliver on its purpose63

:

Corporate law should place purpose at the heart of the corporation and require

directors to state their purposes and demonstrate commitment to them.64

Regulation should expect particularly high duties of engagement, loyalty and care on

the part of directors of companies to public interests where they perform important

public functions.

61

The Perils of Stakeholderism, The Economist (September 19, 2020), 65. 62

P.J. Buckley, “Can Corporations Contribute Directly to Society or only through Regulated Behaviour?”,

Journal of the British Academy, 6(1) (2018), 361. 63


British Academy Future of the Corporation, 2019), 8-9. 64

The British Academy suggested that a possible formulation for corporate law standards might be

“directors of companies must establish their company purposes, act in a way they consider most likely to

promote the fulfilment of their purposes, and have regard to the consequences of any decision on the

interests of shareholders and stakeholders in the firm”. Id. at 20.

Purpose


19 Ownership should recognize obligations of shareholders and engage them in

supporting corporate purposes as well as in their rights to derive financial benefit.

Corporate governance should align managerial interests with companies’ purposes

and establish accountability to a range of stakeholders through appropriate board

structures. They should determine a set of values necessary to deliver purpose,

embedded in their company culture.

Measurement should recognize impacts and investment by companies in their

workers, societies and natural assets both within and outside the firm.

Performance should be measured against fulfilment of corporate purposes and profits

measured net of the costs of achieving them.

Corporate financing should be of a form and duration that allows companies to fund

more engaged and long-term investment in their purposes.

Corporate investment should be made in partnership with private, public and not-for-

profit organizations that contribute towards the fulfilment of corporate purposes.

The British Academy noted that the principles did not include prescriptions for specific

actions to be taken by businesses and, in fact, realization of many of the principles would

require actions by groups over which businesses have limited influence. For example,

the principles pertaining specifically to law and regulation would require actions by

lawmakers in both the legislature and the courts. Moreover, successful adoption of some

of the principles would require that the business and financial communities sincerely

adopt significant changes in the way that they do business and measure and reward the

performance of their leaders. The efficacy of the principles also depends on the

willingness of investors, in their roles as owners of businesses, to accept a different

concept of purpose and incorporate it into their investment goals and expectations.65

In 2018, a group of purpose and sustainability advisors warned of “systemic failure” in

the world’s ability to address the many environmental and social challenges referenced in

the SDGs, noting the impediments to collaboration and progress caused by the lack of

adequate global legislation and standards to provide clear “rules of the game” for a viable

global economy coincides with growing nationalist and populist politics. Their guidance

to businesses was that they could no longer leave it to markets, governments or a

relatively weak civil society to respond to these challenges and that they need to take an

urgent and proactive role in delivering the transformational change required because no

business could thrive over the long-term in a world that is not sustainable. The advisors

called on businesses align their core identity and actions with a “sustainable purpose”,

described as a purpose that “is a meaningful, enduring reason for an organization to exist

65

In fact, not everyone has been convinced by statements such as those attributed to Larry Fink above.

Mark Goyder, the founder of the UK-based think-tank Tomorrow’s Company, challenged Fink to reconcile

the short-termism of many of Blackrock’s funds with his calls for a focus on the long term as being

essential if companies are to serve society as well as their shareholders. M. Goyder, “Larry Fink’s 2020

letter to investors gives us more questions than answers”,

http://markgoyder.com/index.php/2019/01/22/larry-finks-2020-letter-to-investors-gives-us-more-questions-

than-answers/

Purpose


20 that provides solutions to global challenges, or benefits society, in a way that sustains the

social and environmental systems we rely upon”.66

It is clear that there will be obstacles that will need to be overcome in implementing the

principles described above at a macro-level; however, they provide a useful and

important agenda for companies interested in navigating their own paths toward

becoming a purpose-driven enterprise. In fact, companies can act on their own to define

and articulate their purpose and use the principles outlined above as a guide to becoming

a “purposeful business”. The first step for companies is to identify and articulate their

“purpose” in a way that informs all of their stakeholders about the path they will be

taking and their role in fulfilling their economic, social and environmental mission and

goals and demonstrate their commitment to achieving those goals.67

As mentioned above, advocates for purpose business argue that companies should be

formed to profitably solve the problems of people and planet, and not profit from causing

problems; however, articulating the purpose means describing a particular societal and/or

environmental problem and exactly how the company intends to contribute to solving the

problem by assisting people, organizations, societies and nations while creating value for

all of its stakeholders (including, but not limited to, its shareholders). Many statements

of purpose touch on one, but not all of the elements mentioned above. For example, a

pharmaceutical company might announce that it is focused on driving change to defeat

serious chronic diseases, but these words are arguably too broad and the statement fails to

be elaborate on shared value among stakeholders. Similarly, an intention to conduct the

business for the benefit of members as a whole, deliver long term value for a range of

stakeholders and seek positive outcomes for society is laudable, but perhaps too vague.68

When identifying and defining a corporation’s environmental and/or social purpose,

reference can be made to a range of legal and voluntary standards and instruments that

have emerged over the last few decades as the world has struggled to create an agenda for

sustainable development and define the role of businesses therein. One possible point of

reference is provided by the statutes that have been written in various states to provide a

framework for formation and governance of “benefit corporations”. For example,

companies incorporated as benefit corporations in New York are allowed to operate for a

specific public benefit, which may include but is not limited to, “(1) providing low-

income or underserved individuals or communities with beneficial products or services;

(2) promoting economic opportunity for individuals or communities beyond the creation

of jobs in the normal course of business; (3) preserving the environment; (4) improving

human health; (5) promoting the arts, sciences or advancement of knowledge; (6)

increasing the flow of capital to entities with a public benefit purpose; and (7) the

accomplishment of any other particular benefit for society or the environment”.69

66

https://www.sustainablepurpose.com/ 67



Id. at 16. 69

New York Business Corporation Law §1702(e).

Purpose


21 Selecting one or more challenges of the type listed above is essential; however, it is just

the first step in the defining the company’s purpose. Just as important is identifying and

creating accountability to each of the stakeholders of the corporation, not just the

shareholders. While the law has been slow to change, there is evidence in jurisdictions

around the world that directors can, and should, assume fiduciary duties to the

corporation’s stakeholders, defined as “any group or individual who can affect or is

affected by the achievement of the organization’s objectives”.70

Stakeholders can include

customers, employees, communities, suppliers, shareholders and the environment, and

companies need to commit to consultations with the legitimate representatives of all of

the stakeholder groups to achieve consensus on the company’s purpose and forge

consensus on the value to be delivered to those stakeholders and how it will be measured.

Articulating a purpose, a meaningful and enduring reason to exist that aligns with long-

term financial performance, is an essential foundation for creating a sustainable business

and provides a clear context for daily decision making and unified and motivates relevant

stakeholders.71

However, satisfying multiple stakeholders involves a difficult balancing

process and a corporation’s purpose needs to continuously revisited and reexamined as

circumstances change. Throughout the lifecycle of the corporation, governance

mechanisms and procedures need to be in place to ensure that the corporation, through

the day-to-day actions of its managers and employees, remains faithful to its purpose and

accepts accountability and an obligation to report transparently on its progress.

Development and implementation of these mechanisms and procedures will require new

skills and innovative approaches to dealing with traditional topics such as corporate

governance, investors’ relations, raising capital, organizational culture, compensation and

incentives and measuring and reporting on performance. The range of challenges was

explained by Grayson, Coulter and Lee:

“Purpose explains why the business exists. It cannot, however, be pursued in

isolation. It requires a comprehensive Plan (Strategy) to bring it to life, which

extends both across the business and its value-chain; a culture which supports it

(innovative, engaging and empowering, responsible and ethical, and open,

transparent & accountable); collaboration with a range of business and other

partners to scale impact; and advocacy (speaking out and speaking up for social

justice and sustainable development) to amplify and nurture the conditions that

favor sustainability.”72

70

R. Freeman, Strategic Management: A Stakeholder Approach (Cambridge: Cambridge University Press,

1984). 71

The What, The Why And The How Of Purpose - A guide for leaders (Chartered Management Institute,

2018), https://www.managers.org.uk/~/media/Files/Reports/Guide-for-Leaders-White-Paper.pdf 72

D. Grayson, On Purpose (January 24, 2019), https://businessfights poverty.org/articles/on-purpose/

(citing D. Grayson, C. Coulter and M. Lee, All In: The Future of Business Leadership (London: Routledge,

2018)) Grayson also noted that some of the most effective processes have started with employees having

the opportunity to identify their own personal purposes in the context of full socialization of discussions

regarding the definition of the business purpose so that there was clarity throughout the organization on

what the business will do--and also crucially won’t do—so that expected values and behaviors were clear.

https://www.managers.org.uk/~/media/Files/Reports/Guide-for-Leaders-White-Paper.pdf

https://businessfights/

Purpose


22 The group of purpose and sustainability advisors referred to above gave similar guidance

on the steps that companies needed to take to successfully develop and implement a

sustainable purpose: properly understand the wider ever-changing impacts of global

challenges on the company and the company’s influence on them, using a robust

sustainability framework such as the SDGs; use this understanding to inform the choice

of long-term sustainable purpose for the company with the assistance of tools such as

Blueprint for a Better Business Principles and Framework and The Purpose Toolkit by

Business in the Community; develop strategic responses to deliver its purpose at two

levels: how the company will directly and indirectly contribute to wellbeing sustainably

across its entire supply chain through to the use (and disposal) of the product/service and

how the company will shape and influence the wider sector/systems to underpin ongoing

success (e.g., regulation; market mechanisms and empowering citizens); and integrate the

purpose into the culture, governance, commercial strategy, management and operations

of the company so that it informs decision-making at all levels.73

Beyond the fundamental and important issue of purpose, businesses can also voluntarily

and proactively do the following74

:

Regulation. Where companies (e.g., utilities, banks, auditing firms, and public

service providers) perform public functions that create a dependency of a segment of

society on them by virtue of their product, market or function, they should adopt

social licenses to operate as their purposes require and maintain that license through

engagement, and regulators of those firms should oversee their statements and

implementation of purpose.75

Ownership. The holders of ownership interests in the company (i.e., the shareholders

of a corporation) should acknowledge and accept their obligations and responsibilities

to define and support the purpose of the business, not just the pursuit of financial

benefits. Ownership should recognize that the value of the company is based on its

ability to solve social issues and value should not be pursued and achieved at the

expense of other parties. Companies should identify investors supportive of their

purposes who, through holding significant blocks of ownership interests for extended

periods of time, offer the stability of ownership required to fulfil their purposes.76

Governance. The board should establish the company’s purpose, values and strategy;

establish board governance arrangements (i.e., board composition, training, diversity,

committees) that promote the successful adoption and implementation of the

73

https://www.sustainablepurpose.com/ (also includes extensive links to articles and books on purpose and

sustainability; sustainability frameworks; and purpose frameworks, toolkits and initiatives). The Blueprint

for Better Business developed five principles of a purpose driven business: be honest and fair with

customers and suppliers; be a good citizen; adopt a purpose which delivers long-term sustainable

performance; be a responsible and responsive employer; and serve as a guardian for future generations.

See The What, The Why and The How of Purpose: A Guide for Leaders (A Blueprint for Better Business

and Chartered Management Institute, July 2018). 74



Id. at 21. 76

Id. at 22.

https://www.sustainablepurpose.com/

Purpose


23 company’s purposes; determine a set of values consistent with the company’s

purposes and ensure that these are embedded in company culture through the actions

and leadership of board members; create appropriate and inclusive forms of

accountability to relevant stakeholder groups (e.g., councils, forums and supervisory

boards) in the delivery of the company’s purposes; and allocate the resources required

for the company to meet its objectives and measure performance against them.77

Measurement. Measurement techniques should extend beyond the traditional

emphasis on financial and material assets to include the investments that companies

make in their workers, societies and natural assets both within and outside the firm.

Companies should sign up to a standardized set of metrics that assess the extent to

which they adhere to common minimum standards of conduct in relation to people

and planet; determine the metrics that are most relevant to their specific corporate

purposes and adopt key performance indicators to evaluate and reward employees

against them.78

Performance. Companies should measure performance against fulfilment of their

purposes and their profits should be measured against achievement of both purposes

and financial performance and net of the costs of achieving them.79

Companies

should restate their profits to make provisions for the costs of remedying failures to

fulfil their purposes and avoiding negative impacts on their workers, societies and

natural assets both within and outside the firm.

Finance. Companies should pursue financing from investors in a form and duration

that allows them to fund more engaged and long-term investment in their purposes.80

Investment. Companies should establish partnerships with relevant private, public

and not-for-profit organizations in order to pursue the fulfillment of their corporate

purposes and demonstrate their commitments to them by making the investments

required to support these partnerships.81

77

Id. at 23. The rules and guidelines that directors should follow in order to fulfill their fiduciary duties

will ultimately need to be determined by lawmakers and courts. Jurisdictions are beginning to take a more

progressive approach. For example, Section 172(1) of the UK Companies Act 2006 (the “Act”) states that

“[a] director of a company must act in the way he considers, in good faith, would be most likely to promote

the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst

other matters) to—(a) the likely consequences of any decision in the long term, (b) the interests of the

company's employees, (c) the need to foster the company's business relationships with suppliers, customers

and others, (d) the impact of the company's operations on the community and the environment, (e) the

desirability of the company maintaining a reputation for high standards of business conduct, and (f) the

need to act fairly as between members of the company.” The British Academy commented that the

language in the Act enshrines what is sometimes termed “enlightened shareholder value”, but also noted

that it does not permit directors to further interests of stakeholders at the expense of shareholders or provide

protection to companies that promote purposes beyond shareholder value. Id. at 20. As such, directors

must proceed cautiously, although it does appear that they can and should take into account the factors in

the Act as part of their overall deliberations on strategy and in making specific operational decisions. 78

Id. at 25. 79

The British Academy called for profit and loss statements to recognize expenditures on workers, societies

and natural assets made by companies to deliver their corporate purposes as investments and for allowing

companies to expense them over their relevant lives in an analogous fashion to physical assets. Id. at 26. 80

Id. at 27. 81

Id. at 29.

Purpose


24 ____________________

About the Author

This chapter was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for

legal and financial professionals, managers, entrepreneurs and investors has made him one of the best-

selling individual authors in the global legal publishing marketplace. His cornerstone work, Business

Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the

world’s largest legal content platform, which includes almost 200 book-length modules covering the entire

lifecycle of a business. Alan has also authored or edited over 90 books on sustainable entrepreneurship,

leadership and management, business law and transactions, international law and business and technology

management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore,

Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard

Business Publishing, CCH and BNA. Alan is currently a partner of GCA Law Partners LLP in Mountain

View CA (www.gcalaw.com) and has extensive experience as a partner and senior counsel with

internationally recognized law firms counseling small and large business enterprises in the areas of general

corporate and securities matters, venture capital, mergers and acquisitions, international law and

transactions, strategic business alliances, technology transfers and intellectual property, and has also held

senior management positions with several technology-based businesses including service as the chief legal

officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief

operating officer of an emerging broadband media company. He has been an adjunct faculty member at

several colleges and universities, including Berkeley Law, Golden Gate University, Hastings College of

Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance,

venture capital, corporate governance, Japanese business law and law and economic development. He has

also launched and oversees projects relating to sustainable entrepreneurship and ageism. He received his

A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate

University, and a Ph. D. from the University of Cambridge. For more information about Alan and his

activities, and the services he provides through GCA Law Partners LLP, please contact him directly at

[email protected], follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and

visit his website at alangutterman.com.

About the Project

The Sustainable Entrepreneurship Project (www.seproject.org) was launched by Alan Gutterman to teach

and support individuals and companies, both startups and mature firms, seeking to create and build

sustainable businesses based on purpose, innovation, shared value and respect for people and planet. The

Project is a California nonprofit public benefit corporation with tax exempt status under section 501(c)(3)

of the Internal Revenue Code dedicated to furthering and promoting sustainable entrepreneurship through

education and awareness and supporting entrepreneurs in their efforts to launch and scale innovative

sustainable enterprises that will have a material positive environmental or social impact on society as a

whole.

Copyright Matters and Permitted Uses of Work

Copyright © 2020 by Alan S. Gutterman. All the rights of a copyright owner in this Work are reserved and

retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to

copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike

(CC BY-NC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-nc-

sa/4.0/legalcode.

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mailto:[email protected]

https://www.linkedin.com/in/alangutterman/

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