Shareholder Voice and Corporate Purpose: The Purposeless of Mandatory Corporate Purpose Statements

Abstract

In his 2018 book, Prosperity, Professor Colin Mayer puts forward the proposition that a single, “embarrassingly simple” change to corporate law would transform “at a stroke” the conduct of large companies. After this reform, it is argued, boards would no longer follow the maxim of Milton Friedman that their goal is to maximise profits. Instead, once companies were required to include in their constitutions a commitment to a purpose which contained a social or communal goal, as well as a profit-making one, they would operate so as to find “profitable solutions to the problems of people and the planet.” This paper argues that this result is unlikely to follow without either a substantial re-set of the shareholder-centric features of corporate law or a fundamental change in how investors conceive of their goals when acquiring equity positions in companies.

The paper proceeds by analysing two hypothetical cases. In the first, shareholders are committed to the Friedmanite maxim. Here, it is argued that they will not adopt, or permit directors to adopt on their behalf, a purpose statement which is effectively constraining of the board’s commitment to profit-making, even if the adoption of a purpose statement is mandatory. The initial stages of this analysis rely on the French experience with voluntary, but officially encouraged, corporate raison d’être statements; on shareholder reactions in the US to proposals that their companies should convert to Public Benefit Corporation status; and on the responses of UK companies to the mandatory requirement in the early companies legislation that companies state their commercial purposes and to the attachment of significant legal consequence to actions falling outside those stated purposes. The paper proceeds to consider ways of overcoming the problems revealed in this analysis. These are an extensive reduction of the shareholders’ powers to hold the board accountable or the specification by a court or regulator of the purpose the company must adopt. It is concluded that neither strategy is likely to be feasible or desirable.

The second hypothetical case is where investors no longer define their goals in purely financial terms but wish to achieve, through their investments, social or communal goals. It is concluded that, although ESG investing may have the potential to move companies in the direction desired by Prosperity, the current manifestations of ESG investing fall short of the transformative goal the book envisages. Moreover, it is unclear whether that potential will be realised in the future. If it is, it is argued that the current structure of corporate law will allow the investors’ desires effectively to flow through into the board’s management of the company, even in the absence of a mandatory purpose requirement in legislation.

In short, the paper concludes that the mandatory purpose requirement will either be largely ineffective by itself (the first hypothetical case) or largely unnecessary (the second case).

Keywords: Corporate purposes, shareholder perceptions, directors’ duties, ESG investing