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.
