Broad Shareholder Value and the Inevitable Role of Conscience

This article proposes an integrative solution to the modern debate on corporate purpose, the question of whether directors and officers must solely maximize profits or whether they may consider the effects on employees, the environment or the community. Many find pure profit maximization unseemly and suggest alternative theories, typically arguing that corporations owe a duty to a broader range of stakeholders. This position is inconsistent with the case law and unnecessary to allow conscience in the board room. We resolve the issue more simply by acknowledging that the purpose of a corporation is to promote the shareholders’ interests, which includes the shareholders’ financial and nonfinancial interests. These nonfinancial interests could encompass product safety, the treatment of employees or environmental concerns. We refer to this focus as broad shareholder value. In this article we show that a broader view of shareholder value is superior to competing models in theory, in case law, and in explaining the empirical evidence. First, our theories of what a corporation is (corporate identity) imply that the proper corporate purpose is promotion of broad shareholder value, not mere profit maximization or duties to other stakeholders. Second, the case law does not require pure profit maximization, as has been claimed, but instead allows consideration of other shareholder interests. For support, we provide a new understanding of the case law using principles of game theory and applying evidentiary burdens. And third, a theory of broad shareholder value best explains the empirical evidence of what directors and officers actually do and what shareholders actually want. In short, real world evidence shows that pure wealth maximization theories lack both explanatory power and a normative mandate in the real world. A broad shareholder value norm provides a stronger explanation and mandate than pure wealth maximization, without contradicting case law requirements that boards consider only the interests of shareholders, rather than other stakeholders