How to Settle the Corporate Purpose Debate

Abstract

The debate over the purpose of the public corporation has gone on for decades. The idea that companies should prioritize the interests of shareholders gained widespread acceptance in the 1980s. However, the tide turned in the last decade as a growing number of CEOs, boards, employees, customers, social activists, and investors support a move from corporate governance focused on shareholders to one that prioritizes the interests of stakeholders.

Shareholder and stakeholder advocates are unlikely to find common ground any time soon. This article presents four roadblocks responsible for the impasse: stakeholders and shareholder proponents interpret the law differently; companies adopt lofty purpose statements that seek to engage and motivate stakeholders but have little to say about the company's priorities; the meaning of stakeholder governance is ambiguous; and stakeholder advocates routinely display a complete misunderstanding of the concept of shareholder value.

The article concludes with three essential steps to promote transparency and a more efficient market for corporate governance that benefits both stakeholders and shareholders. Stakeholder and shareholder governance proponents, boards of directors, CEOs, and the investment community face two essential choices. They can allow the never-ending corporate purpose debate to continue, or they can join forces to establish a transparent market for corporate governance.