Document Type

Article

Publication Date

3-25-2020

Abstract

The hot topic in corporate governance is the debate over corporate purpose and, in particular, whether corporations should shift their purpose from the pursuit of shareholder wealth to pursuing a broader conception of stakeholder or societal value. We argue that this debate has overlooked the critical predicate questions of whether a corporation should have a purpose at all and, if so, why,

We address these questions by examining the historical, legal and theoretical justifications for corporate purpose. We find that none of the three provides a basis for requiring a corporation to articulate a particular purpose or for a given normative conception of what that purpose should be. We additionally challenge recent corporate commitments to stakeholder value as lacking both binding legal effect and operational significance.

We nonetheless argue that articulating a corporate purpose can be valuable, and we justify a specification of corporate purpose on instrumental grounds. Because a corporation consists of a variety of constituencies with differing interests and objectives, an articulated corporate purpose enables those constituencies both to select those corporations with which they wish to identify and to navigate the terms of that association through contract or regulation. Our instrumental view of the corporation brings a new perspective to the purpose debate. Although we do not address competing normative claims about what a corporation’s purpose should be, our instrumental argument leads us to conclude that, at least as a default matter, the purpose of a corporation should be understood as maximizing the economic value of the firm.

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