What is the purpose of the corporation? Remarks at the UCLA Faculty Colloquium

What is the purpose of the corporation?

Is it, as Milton Friedman famously claimed, to increase its profits for the benefit of its shareholders? Or does a corporation have responsibilities to its non-shareholder stakeholders or even to the broader society?

This has been an active debate at least since the famous exchange between Adolf Berle and Merrick Dodd in the Harvard Law Review in the mid-1930s.

But the last few years have seen a resurgence in interest in this foundational question. We have seen:

• The emergence of ESG investing—which uses environmental, social, and corporate governance metrics as well as profit to choose companies. ESG investing has thus given greater rigor to traditional socially responsible investing. ESG funds now have over $17 trillion in assets under management, which is about a third of all professionally managed investments.
• The rise of Benefit Corporations, which are expressly authorized to make tradeoffs between profits and some chosen public benefit. Thirty-five states, including Delaware—which as you know is the most important state in corporate law—now authorize benefit corporations and it is estimated over 5,000 exist.
• Political attention has rarely been more intense. Both Senators Warren and Sanders included mandatory corporate responsibility ideas in their platforms. Senator Warren continues to push her proposed accountable corporation bill, which would mandate some socially responsible activities. The Biden administration is taking more of a piecemeal approach, such as the efforts by the new SEC to require more extensive corporate disclosures of climate change risk.
• All of which is pushing companies to begin moving voluntarily.

In August 2019, the Business Roundtable released a statement on the purpose of the corporation in which it made a major break from its longstanding position. Starting in 1997, the BRT had issued a series of statements positing that corporations exist principally to serve their shareholders. In its 2019 statement, however, the BRT announced that going forward its members would recognize that “we share a fundamental commitment to all of our stakeholders.” The 181 signing CEOs committed themselves to leading “their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.”

I’ve signed a contract with Cambridge University Press to write a book on these developments. I’ve been thinking about these issues for over 30 years—my third law review article was on so-called nonshareholder constituency statutes—so it will be an opportunity to review, reassess, and perhaps serve as a capstone to my work in this area.

In particular, I plan to devote a lot of research and thought to the question of why the BRT abandoned its prior position and embraced a much more ESG-friendly one.

So far, I’ve come up with five possibilities:

1. Some of the signatories are themselves social justice warriors. Salesforce.com CEO Marc Benioff, for example, famously promotes social activism.
2. The BRT leaders are responding to perceived consumer and labor demand.In particular, millennials apparently prefer to work for and purchase from companies that are perceived as socially and environmentally responsible. Accordingly, there is an increasingly widely held view in the business community that to attract Millennial and Generation Z workers and customers, companies must project an image as social justice activists. Nike’s embrace of Colin Kaepernick is but the most obvious example of this phenomenon.
3. The BRT may be trying to head off regulation by progressive politicians. With the mainstream of the Democratic Party seemingly moving in Warren’s direction on business and finance issues, the BRT’s members may have hoped that a voluntary—and perhaps intentionally ambiguous—embrace of corporate social responsibility platitudes would help them fend off more intrusive regulation.
4. 4. The BRT may be responding to pressure from a few very powerful investors, especially the big three institutional investors, have embraced social activism in support of progressive goals with respect to the funds they manage.
5. Some BRT members may crave a return to the days of imperial CEOS. Aside from a brief period in the 1980s, when the hostile takeover was viable, CEOs were virtual emperors for most of the last 100+ years. Over the last decade or two, however, shareholder activists have grown in number and power. Unlike the gadflies of old, the new activists—mainly hedge funds—have been all about shareholder return. We have seen repeated cases where hedge fund activism has forced out CEOs (and entire boards), resulted in massive changes in corporate strategy, and even led to companies being broken up. By embracing stakeholderism, the BRT leaders may hope to restore a measure of freedom.

I must confess to a certain degree of skepticism about how seriously we should take the BRT’s purported change of heart. Last fall, during the pandemic and shortly before the holiday season began, Marc Benioff announced that Salesforce was going to permanently layoff 1,000 of its 54,000-person. That announcement came one day after Salesforce announced record quarterly sales.

I don't think even Scrooge would have told his employees that in a few months down the road 2% of them would be fired, leaving them to twist slowly in the wind for months while worrying whether they'll be among those who get fired.

Obviously, I don’t expect to have the last word on a debate that has roiled law and business scholarship for approaching a century. The debate will continue. Probably forever. But I’m hoping to contribute.