Freedom of Corporate Purpose
77 Pages Posted: 13 Apr 2016 Last revised: 11 Dec 2018
Date Written: 2017
Every few decades, there erupt political and academic debates over the proper nature and purpose of the corporation. It is black letter law, according to most scholars, that corporations exist to maximize shareholder wealth. Others maintain that the corporation should exist for the benefit of multiple constituencies, regardless of what current black letter law may say. The current discourse of corporate purpose, however, is incomplete and misleading. The disarray has resulted from insufficient reliance on historical context in (1) analyzing the firm under modern theories of corporate governance, and (2) interpreting the “purpose” language in corporate charters and corporation-law statutes.
Modern conceptions of corporate governance, and by extension, corporate purpose, have failed to account for the historical evolution of the firm. Significantly, they characterize the corporation along too few dimensions, typically treating the firm as merely, and exclusively, a contract- or property-based entity; and they neglect to treat the later stage corporation as a historical entity that inherits characteristics and restrictions, including its purpose, from the time of its founding.
Corporations are a triality of property, contractual, and associational rights. Firms can simultaneously and independently be described along each dimension. The triality of rights should entitle shareholders to form general corporations to pursue the ends of their choosing — shareholder wealth maximization or otherwise. Focusing on one aspect of the firm at the expense of the other two, however, obscures the central place of shareholder ends in the corporation. At its inception, the corporation is nearly indistinguishable from its shareholders, who possess the special talents or resources around which the enterprise is started. They possess all the property, financial, and control sticks in the corporate bundle of rights. They associate via the corporate form to better achieve some end than they could without it. Shareholders necessarily give up ever more control as the firm grows. But even at later stages in a firm’s life, shareholders retain enough rights to entitle them to have their corporations run in pursuit of the purposes they established at the firm’s founding (or later modified via the proper procedures).
This Article distinguishes two understandings of the corporate “purpose” language that is a statutorily required component of every corporate charter. The first is what the Article terms the corporation’s “tactical,” or operating, purpose. A corporation engages in its operations as it pursues its “strategic” purpose. The strategic purpose is the telos of the corporation or its board of directors. Shareholder wealth maximization is the archetypical strategic purpose, and the one most naturally derived from the corporate bundle of rights.
The Article addresses the assertion that corporate law does not, at least by default, require directors to maximize shareholder wealth, and concludes that this claim is indefensible when viewed in proper context. This fundamental stockholder right established, the Article proposes expanding existing law to allow stockholders to charter corporations for any lawful strategic purpose, given sufficient notice to potential mid-stream shareholders. It thus argues for a clarification of the marked uncertainty in corporate law as to whether nonwealth corporate ends are cognizable. Corporate law provides the pieces to maximize the social benefit enabled by the corporate form. This Article offers a flexible yet simple way to join those pieces together by permitting, but not requiring, stockholders to depart from the wealth maximization norm.
Keywords: corporate governance,corporate law,shareholder wealth maximization,corporate purpose,shareholder primacy,director primacy,team production
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