By Gwyneth K. Shaw
As corporations have tried in recent years to draw in customers by appealing to their consciences—increasing profit sharing with workers or making a donation for every sale, for example—it’s sparked a debate in the corporate law sector about what a company’s purpose should be.
That debate was fueled last summer when the Business Roundtable, a major trade group headed by top CEOs, released a statement saying corporations should pivot from a focus solely on shareholders to one that serves a broader range of stakeholders, including workers, customers, suppliers, and the community.
In a new working paper, Berkeley Law Professor Steven Davidoff Solomon and University of Pennsylvania Carey Law School Professor Jill Fisch take on the question that’s consumed the chatter. Should a Corporation Have a Purpose? examines the historical, legal, and theoretical arguments. The paper also presents a theoretical framework for establishing a corporate purpose.
A faculty co-director of the Berkeley Center for Law and Business, Solomon has had a paper named to Corporate Practice Commentator’s annual Top 10 Corporate and Securities Article list in four of the past five years. Solomon, who writes the Deal Professor column for The New York Times’ DealBook section, discusses his new scholarship below.
Q: What drew you to this topic and what has the conversation been like in the field about this?
Solomon: This was the hottest topic in corporate law up until the pandemic. Namely, do businesses have wider societal obligations, and what should their role be in society? It has been spurred by the Business Roundtable statement that corporations are run not just for shareholders but all stakeholders.
Q: Has the conversation shifted in the past couple of months, as corporations have had to confront the massive disruptions presented by the COVID-19 pandemic?
Solomon: In a crisis, people—and corporations—focus on survival, so companies are rapidly laying off workers and retrenching. Some have tried to do this as humanely as possible, others like retailers have not had the ability to be as accommodating since no money is coming in. Prior to the crisis, this debate was essentially framed like this: Just as companies cater to shareholders, they should have a wider corporate purpose that serves a broader range of stakeholders. The question we asked, based on this debate, was (a) what does this mean? And (b) can we provide any framework for why this should be the case? We were trying to give clarity to the debate.
Q: What are some of the reasons given for why a corporation should have a specific purpose?
Solomon: I think there have been two main reasons. The first is people no longer buy products, they buy brands that support their identity, and so corporations are starting to articulate values for their customers because they know their consumers want to live those values. One example of this that we cite in the paper is the decision by Dick’s Sporting Goods to stop selling assault rifles in the wake of the school shooting in Parkland, Florida.
The second thing is there is a real fear of corporate regulation, and this movement can be viewed as companies getting ahead of these issues, by showing they care about more than just profits.
Q: What’s the problem with that, from your perspective (and that of the paper)?
Solomon: The issue is whether this is just what we call greenwashing. Are corporations trying to put forth a positive view of the company without backing it up? You could take a very cynical view that this is all just public relations, and our paper tends to take that view.
Q: Where does the paper land in this debate?
Solomon: We ask whether corporations should even have a purpose, and the way to think about it is, what is your purpose? Do people need a purpose? Why should companies want to have a purpose? It’s remarkable, because nobody’s really thought through all these issues that deeply.
Our conclusion is companies should have a purpose. We think it’s important because of the expectations of the parties, the institutional benefit, and basically it allows people to commit to the corporate enterprise. For example, if I am an employee I may be more willing to work for a corporation which has a particular ethical outlook or commits specifically to benefit me. Investors will invest because they know what the company will do. Employees will invest through their labor, because it’s something they want to be a part of. We also conclude, maybe more controversially, that a lot of this talk about other stakeholders is really more PR than anything else.
Q: What should a company’s purpose encompass and why?
We think corporations should have a purpose—to maximize the value of the firm. Once the firm value is maximized, then we can debate how that profit is allocated whether among workers or shareholders. A lot of the talk going on about other purposes is unenforceable, and companies already can do all that with a for-profit motive. So all the things that companies are doing now, you can do under the current law, which allows you to make charitable donations, share your profits with your employees, choose sustainable materials or production methods, and the like.
We say a corporation’s basic, stated purpose should ultimately be to maximize value, because we’re very concerned about what we could call rent-seeking behavior—that companies will use ulterior purposes, or the CEO’s favorite charity, to manipulate consumers. We’re not saying companies shouldn’t take care of their workers, or the community. If a company makes a lot of money, how should it divide the profits? We don’t have a say on that. We think that’s a separate debate and a bit of a distraction.