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Dr Andreas Kokkinis comments on a call to shift corporate priorities from profit to social purpose

Commenting on the statement issued by the influential US group, the Business Roundtable, Dr Andreas Kokkinis said:-

"The Business Roundtable, one of the most influential US business groups representing some of the largest US companies, has just reversed its long-standing policy on the purpose of the business corporation. Up to now the Roundtable has always ascribed to what is widely known as shareholder value ideology, according to which the primary purpose of large companies that are traded on stock exchanges is to maximise investment returns for their shareholders.

"The new corporate purpose was phrased by the Roundtable as “An Economy That Serves All Americans” and clearly follows the stakeholder value paradigm, according to which business corporations should balance the interests of all stakeholders. Stakeholders comprise all individuals and groups who are affected by corporate behaviour; so apart from shareholders they include employees, suppliers, customers, creditors and local communities.

"This move is less surprising than it appears at first blush. Historically speaking, the idea that corporate managers should be trusted to balance different interests was commonplace in the UK and the US in the 1950s and 1960s, before the rise of shareholder value ideology. It has always been dominant in many continental European and East Asian developed economies.

"Recent political pressures on large companies have made them aware of what they perceive as a risk of new regulation on matters such as employee representation, executive remuneration and shareholder voting rights combined with a risk of higher taxation. The move by large American companies to take a soft non-legally binding position that creates the appearance that legal and regulatory intervention is not necessary resembles the emergence of the UK Corporate Governance Code as a self-regulatory attempt to pre-empt Government intervention.

"But will this change of narrative make any difference? In his recent monograph on the history of the American public corporation since 1950, Professor Brian Cheffins, of the University of Cambridge concludes that the shareholder value norm is here to stay and will continue to shape business practice for the foreseeable future. I would agree that, in the absence of major legal intervention, this is indeed the most likely outcome, as shareholder value maximisation is driven by strong pressures from the capital markets and, more recently, by institutional investor activism.

"The most difficult question is whether legal interventions to deliver a stakeholder value approach are desirable from a policy perspective. It has not so far been possible to establish empirically which of the two paradigms is conducive to greater wealth creation. Neoclassical economics suggests that the shareholder value model leads to the most efficient outcomes. Institutional economics and other branches of economics have provided theoretical counter-arguments. At a deeper level, it should not be taken for granted that the only relevant criterion to decide the legitimate purpose of large corporations is economic efficiency. Whether other criteria, such as distributive justice and democratic participation, may also carry normative weight remains a contested issue in the theory of corporate law. "

20 August 2019

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