Toward a Dynamic View of Corporate Purpose

Scholars debating the corporation’s role in society generally advance the view that there is only one desirable orientation for corporations and their management. Specifically, proponents of a stakeholder governance model contend that focusing management on a broad set of corporate constituents maximizes overall welfare, while advocates of a shareholder-centric directive counter that prioritizing shareholders creates social welfare by rendering the firm most profitable. This Article offers another view: It suggests that the welfare-maximizing purpose for corporations could change depending on external economic conditions, which both of these positions assume away. Specifically, shareholder primacy is likely to promote welfare in a first-best world, where the government regulates corporate externalities, ensures competitive markets, and responds to inequality. Once these assumptions are relaxed, however, the case for stakeholder governance improves.



The Article supports this theoretical insight with a detailed analysis of two historical periods in which the dominant view of corporate purpose in society changed dramatically. Specifically, it describes two corporate purpose “moments” of flux in the U.S.—one that occurred after the great stock market crash of 1929, and another following a period of economic stagflation in the 1970s —in which the pendulum swung from one governance model to the other, impacting scholarship, business practice, and law. These historical snapshots reveal that departures from a shareholder-oriented model have been preceded by extreme external economic conditions, consistent with the theoretical insight offered here. This analysis also sheds light on the present moment, in which inequality, corporate concentration, and environmental degradation have generated heated debates about the corporation’s role in society once again.