Corporate Social Responsibility and the Legitimacy of the Shareholder Primacy Norm: A Rawlsian Analysis

Abstract

Shareholder primacy is considered a major impediment to corporate social responsibility. This paper examines the status of the Shareholder Primacy Norm under US and UK law and shows that it is no longer legally enforceable, but remains a powerful social norm among managers, in part because of the sole voting rights of shareholders. Accordingly, we apply Rawls’ social contract theory to evaluate the legitimacy of shareholder primacy as manifest through the voting rights of shareholders and assess whether this principle of governance would be endorsed or the Stakeholder Equality Norm, a competing norm proposed here as an operationalization of stakeholder theory. Contrary to expectations, we find that a Rawlsian analysis is more supportive of shareholder primacy than stakeholder theory because it dictates that economic efficiency would determine the best governance principle and shareholder primacy would likely be more efficient. However, shareholder primacy would not be unfettered because justice considerations of Rawls’ theory impose exogenous constraints, primarily in the form of legislation. We conclude by showing that the on-going debate between shareholder primacy and stakeholder theory is in many respects about the choice between exogenous vs. endogenous constraints and essentially a debate between political liberalism and libertarianism.