Corporate Social Responsibility through Shareholder Governance

New approaches to corporate purpose have emerged in recent years that hold out the promise of addressing concerns about corporate social responsibility (CSR) through shareholder governance, rather than in spite of it. The seminal such approach—enlightened shareholder value—posits that treating other stakeholders well can ultimately redound to long-term shareholder value. However, two more recent proposals reconceptualize shareholder interests in more holistic ways and urge that it is shareholders’ welfare, not shareholder value per se, that managers should pursue. In particular, the “shareholder social preferences” view incorporates into the corporate objective the degree to which the firm’s operations align with the social views of shareholders. The “portfolio value maximization view,” in contrast, argues that corporate fiduciaries should maximize the value of diversified shareholders’ portfolios by considering the externalities of the firm’s operations on those portfolios.

Shifting to shareholder welfare as the corporate objective, however, would do little to improve corporate conduct and would entail substantial costs. The social preferences of shareholders are conflicted, muted, and often prefer less protection of stakeholder interests than provided by law. Shareholders’ portfolio value captures only a small portion of the externalities like pollution that its proponents hope to address and risks motivating anticompetitive conduct. And neither corporate managers nor shareholders would have the information and incentives needed to pursue these additional shareholder welfare considerations. On the contrary, by distracting management from their core competencies, shareholder welfarism would ultimately lower shareholder welfare.

The future of CSR, as with its past, is instead with enlightened shareholder value (ESV). But the existing law-and-economics literature on ESV has been stunted by key misconceptions, which we attempt to dispel. The increasing use by various actors in the corporate system of normative arguments that sound in ESV terms may lead to new pathways for achieving social progress.