The Rhetoric and Reality of Shareholder Profit Maximization

Abstract

The corporate purpose debate pits shareholder profit maximization (SPM) against stakeholderism: corporations should only serve the financial interests of their shareholders versus corporations should also serve the interests of other stakeholders.  Other stakeholder interests prominently include Environmental, Social, and Governance interests. 

The two sides differ as to first principles—the force of the “should.” SPM proponents also claim that SPM is instrumentally superior—that it guides boards in how to do their jobs and provides accountability if they do not. I argue that real-world SPM, as distinguished from idealized SPM, cannot claim instrumental superiority over stakeholderism. Even under SPM, corporations must take into consideration other stakeholders’ interests to a far greater degree than is acknowledged. How much profit a firm makes is affected by present or anticipated lawsuits, regulatory scrutiny, regulatory disfavor, shareholder pressure, effects on reputation, and possible changes in law or regulation, including as these reflect or relate to other stakeholders’ interests. Taking other stakeholders’ interests into account “for the corporation’s sake” rather than for the interest holders’ sake is a difference that does not warrant the chasm that the debate assumes. 

Of course, the attention paid to other stakeholders’ interests on account of SPM will not map cleanly onto what many – probably most-- stakeholderists would want.  The “win-win” scenario where something that is, for instance, good for the environment is also good for the bottom line is not apt to straightforwardly justify nearly as much, or the sort of, ESG investment as ESG most proponents think is desirable. SPM understood this way rewards cost-imposition, notably the ability to do so “strategically.” Consider in this respect Disney, the Florida government, and the third parties that have effectively weighed in on important social issues (notably, gay and transgender rights) via corporation actions, and private and public litigation and pressure campaigns.  The costs are significant, but ultimately, actors from many realms are weighing in and making their best case to the various important audiences, including Disney.    

I conclude by suggesting a rhetorical rapprochement, identifying rationales consistent with SPM that take into account changes in the natural, social, and technological world as well as society’s evolving mores—and could appeal to both SPM and stakeholder proponents. Stakeholder voices cannot be silenced, and the debate between SPM and stakeholderism is real. But the rhetoric may be more at odds than the practice needs to be.