Corporate Finance for Social Good
30 Pages Posted: 15 Jan 2020 Last revised: 22 Oct 2020
Date Written: March 25, 2020
Commentators inside and outside of legal academia have urged corporations to use their outsized power to benefit society. But this advocacy is unlikely to alter corporate decisionmaking to the desired extent because shareholder wealth-maximization has become ingrained in the corporation’s incentive structure. This Essay therefore charts a new course. It discusses developments in financial instruments that make funds available for prosocial corporate activity, and shows how such instruments, with a few alterations, could dramatically induce corporations to prioritize stakeholder goals. More specifically, the Essay proposes that individuals use “corporate social responsibility bonds” to offset costs associated with prosocial corporate decision-making. The intuition behind these instruments is grounded in law and economics theory: if it is welfare-maximizing for individuals to see corporations make public-interested choices that are not wealth-maximizing, there should be a possible Coasian bargain between those individuals and the corporation. In such situations, an issuer could create a bond to finance a predetermined public-interested corporate decision, thereby turning stakeholders into creditors with governance rights. Any individual who values the decision more than its cost could participate. To provide an incentive to depart from wealth-maximization, the bond would stipulate that their contribution would be forgiven if the decision was implemented—a key difference from existing prosocial financial instruments.
More broadly, the insight that the individuals with the strongest interest in seeing corporations pursue corporate social responsibility goals are not always the company’s shareholders has consequences for corporate law and corporate governance. In particular, it cautions that we should recognize the limits of corporate law and shareholder activism to achieve socially optimal levels of corporate responsibility. The more difficult question is whether and how to reorient our corporate law system away from shareholders and toward other constituencies. As that project forges on, this Essay proposes action that could allow individuals to influence corporate behavior without any delay—one decision at a time.
Keywords: corporate social responsibility, shareholder primacy, corporate purpose, ESG, corporate finance, corporate governance
JEL Classification: K2, K22
Suggested Citation: Suggested Citation