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SRI proponents must keep challenging the notion that shareholders’ needs are paramount, says Peter Kinder
By law, shareholders own corporations. They elect directors who then run the company. But for whose benefit? Socially responsible investors have one answer. A powerful school of conservative legal scholars and economists, another. But both take root in the shareholder’s role in the corporation.
In the US at least, a corporation is legally defined as a ‘person’ independent of its shareholders or any other group – managers, employees or whoever. The directors’ main fiduciary duties run to the company, not to the shareholders who elected them. ‘What’s best for the company’, not ‘what’s best for the shareholders’ is supposed to be the directors’ guiding principle. That’s been the law in the US for at least 125 years. But the ‘law and economics’ school of legal thinkers has rejected this concept of the corporation. They see the for-profit corporation as solely an economic unit meant to make money within the bounds of the law. This is also the position taken by the economist Milton Friedman in his 1962 Capitalism and freedom, when he was very much in a minority position.
Not the least reason for this argument was that by stripping away all non-financial obligations of a corporation, it became explainable in economists’ models. Messy concepts such as the corporate person’s responsibilities to society don’t readily translate into mathematical notation.
The law and economics professors added to the effort with the concept of shareholder primacy, under which the argument goes that shareholders own corporations and that therefore directors should run them for the owners’ benefit. According to this view, shareholder-wealth maximization became the sole objective of the board. Applied in the real world, the model can reduce the role of the shareholder to that of an actor motivated solely by greed.
The interests of the corporation, however, are wider than the interests of its shareholders alone. This leaves supporters of SRI with an argument that is tough to make: that corporations should not just be run in the short-term interests of shareholders. Challenging the vested interests that benefit from the idea of shareholder primacy is not easy. Yet directors’ and managers’ main duties are actually to the company – in the UK, the principle of ‘promoting the success of the company’ is being enshrined in the Company Law Reform Bill currently going through the House of Lords.
SRI shareholders take on the full range of responsibilities of ownership. Law and economics shareholders just take. ‘Greed is good!’ is an easy argument to make, and it makes sense in economic models. ‘Good is good!’ is much harder, as it fits no readily quantifiable model. But it’s a case that SRI proponents must make – and win. We must keep battling away.
Peter Kinder is president and co-founder of KLD Research & Analytics, Inc.
By law, shareholders own corporations. They elect directors who then run the company. But for whose benefit? Socially responsible investors have one answer. A powerful school of conservative legal scholars and economists, another. But both take root in the shareholder’s role in the corporation.
In the US at least, a corporation is legally defined as a ‘person’ independent of its shareholders or any other group – managers, employees or whoever. The directors’ main fiduciary duties run to the company, not to the shareholders who elected them. ‘What’s best for the company’, not ‘what’s best for the shareholders’ is supposed to be the directors’ guiding principle. That’s been the law in the US for at least 125 years. But the ‘law and economics’ school of legal thinkers has rejected this concept of the corporation. They see the for-profit corporation as solely an economic unit meant to make money within the bounds of the law. This is also the position taken by the economist Milton Friedman in his 1962 Capitalism and freedom, when he was very much in a minority position.
Not the least reason for this argument was that by stripping away all non-financial obligations of a corporation, it became explainable in economists’ models. Messy concepts such as the corporate person’s responsibilities to society don’t readily translate into mathematical notation.
The law and economics professors added to the effort with the concept of shareholder primacy, under which the argument goes that shareholders own corporations and that therefore directors should run them for the owners’ benefit. According to this view, shareholder-wealth maximization became the sole objective of the board. Applied in the real world, the model can reduce the role of the shareholder to that of an actor motivated solely by greed.
The interests of the corporation, however, are wider than the interests of its shareholders alone. This leaves supporters of SRI with an argument that is tough to make: that corporations should not just be run in the short-term interests of shareholders. Challenging the vested interests that benefit from the idea of shareholder primacy is not easy. Yet directors’ and managers’ main duties are actually to the company – in the UK, the principle of ‘promoting the success of the company’ is being enshrined in the Company Law Reform Bill currently going through the House of Lords.
SRI shareholders take on the full range of responsibilities of ownership. Law and economics shareholders just take. ‘Greed is good!’ is an easy argument to make, and it makes sense in economic models. ‘Good is good!’ is much harder, as it fits no readily quantifiable model. But it’s a case that SRI proponents must make – and win. We must keep battling away.
Peter Kinder is president and co-founder of KLD Research & Analytics, Inc.
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