Corporate Law, Profit Maximization and the Responsible Shareholder

Abstract

What are the implications for the debate over corporate social responsibility, and for the normative economic analysis of corporate governance law, of the existence of shareholders whose investment decisions are not based solely on the pursuit of profit or other self-interest?

The Article makes three basic points. First, ethical investing is significant because if corporations pursue stockholder profits to the exclusion of all other considerations, it is not because of managers' corporate law duties, which are unconstraining, but because of stockholder self-interest and market mechanisms that make management sensitive to the preferences of stockholders. Consequently, any hope one may have for greater corporate social responsibility lies with ethical investors rather than with corporate managers alone.

Second, ethical investing is not inconsistent with the nexus of contracts conception, but it is awkward for corporate law theorists who advocate a rule of exclusive profit-maximization.

Third, these theorists respond by characterizing ethical investing as either irrational and aberrant, or else rational and pernicious, both of which characterizations are misguided.

I also consider the implications of the foregoing for two specific questions arising in North American corporate law in connection with ethical investing, specifically (a) whether corporate law should filter out shareholder social responsibility proposals; and (b) whether disclosure of matters relevant to ethical analysis of corporate conduct should be mandatory.

Keywords: Ethical investing, corporate social responsibility, shareholder primacy, nexus of contracts, shareholder proposals, mandatory social disclosure, corporate social transparency, socially responsible investing

JEL Classification: K22