Shareholder Primacy, Corporate Social Responsibility, and the Role of Business Schools

Abstract

This paper examines the shareholder primacy norm (SPN) as a widely acknowledged impediment to corporate social responsibility and explores the role of business schools in promoting the SPN but also potentially as an avenue for change by addressing misconceptions about shareholder primacy and the purpose of business. We start by explaining the SPN and then review its status under US and UK laws and show that it is not a likely legal requirement, at least under the guise of shareholder value maximization. This is in contrast to the common assertion that managers are legally constrained from addressing CSR issues if doing so is inconsistent with the economic interests of shareholders. Nonetheless, while the SPN might be muted as a legal norm, we show that it is certainly evident as a social norm among managers and in business schools-reflective, in part, of the sole voting rights of shareholders on corporate boards and of the dominance of shareholder theory-and justifiably so in the view of many managers and business academics. We argue that this view is misguided, not least when associated with claims of a purported legally enforceable requirement to maximize shareholder value. We propose two ways by which the influence of the SPN among managers might be attenuated: extending fiduciary duties of executives to non-shareholder stakeholders and changes in business school teaching such that it covers a plurality of conceptions of the purpose of the corporation.

Why don't we see more action? A metasynthesis of the investor impediments to integrate environmental, social, and governance factors

“…It can be rather interpreted to balance the interest of all stakeholders in the long‐term interest of shareholders (Fisch, ; Stout, ). Reflecting that SP in many jurisdictions is not a legal but a more social norm among managers and fostered by business schools (Smith & Rönnegard, ; West, ) may prove to be an important watershed for investors regarding how to approach ESG investing going forward. This is also related to the calibration of the corporate objective function and larger discourse about the corporation's purpose (Donaldson & Walsh, ; Fink, ; Porter & Kramer, ).…”

“…Finally, the deep‐seated perception that a company's ESG performance is detrimental to financial performance poses a major impediment for institutional and private investors (Eccles & Kastrapeli, ; Paetzold & Busch, ; Wins & Zwergel, ). In addition to isolated investor experience of underperformance in more short‐term time frames and theme stocks, decades of dogma in education and business concerning the necessary distinction of shareholder and stakeholder interests could be one of the main explanations (Smith & Rönnegard, ; West, ). Further concerns are raised about the financial materiality of ESG factors in general because some perceive them to be designed to inform a broad set of stakeholders instead of investors.…”

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“…However, does corporate law, as it stands, provide the appropriate governance to ensure that corporations act responsibly? As it is ultimately the shareholders who control the board and the top management (Kaufman and Englander 2005;Smith and Rönnegard 2016), one can doubt that directors have sufficient leeway to consider the various stakeholders equally. Even if corporations are under no obligation to maximize shareholders' returns, shareholders can be in a position to demand a quick return on their investment and then withdraw, even to the detriment of long-term sustainability (Mac Cormac and Haney 2012).…”

Certified Benefit Corporations as a new way to make sustainable business: The Italian example

“…For years, the shareholder primacy theory has been considered the dominant principle in corporate management, making corporate decision‐makers focus on the shareholders' interests (Chu, ; Grossman, ; Smith & Rönnegard, ). The relevant part of this theory focuses on the role of management in increasing companies' profits.…”