JILL E. FISCH, University of Pennsylvania Carey Law School, University of Pennsylvania Carey Law School, European Corporate Governance Institute (ECGI)
Email: jfisch@law.upenn.edu

Repurposing the corporation is the hot issue in corporate governance. Commentators, investors and increasingly issuers, maintain that corporations should shift their focus from maximizing profits for shareholders to generating value for a more expansive group of stakeholders. Corporations are also being called upon to address societal concerns – from climate change and voting rights to racial justice and wealth inequality.

The shareholder proposal rule, Rule 14a–8, offers one potential tool for repurposing the corporation. This Article describes the introduction of innovative proposals seeking to formalize corporate commitments to stakeholder governance. These “purpose proposals” reflect a new dynamic in the debate over stakeholder governance by enabling shareholders to communicate their views about corporate purpose to their fellow shareholders and management. At the same time, purpose proposals highlight the potential problems with a shareholder voting process dominated by a handful of institutional intermediaries whose interests, particularly with respect to corporate purpose, may not be aligned with those of their beneficiaries.

This Article provides the first analysis of purpose proposals. It presents data on the introduction of these proposals and the extent to which they have commanded shareholder support. It interrogates the justifications for the proposals offered by their proponents. Finally, it considers the role of the shareholder proposal rule in offering a mechanism for shareholder debate over corporate purpose.

ANJAN V. THAKOR, Washington University, Saint Louis - John M. Olin School of Business, European Corporate Governance Institute (ECGI)
Email: thakor@olin.wustl.edu

Organizational higher purpose is gaining increasing traction in both research and policy discussions about the (desired) role of corporations in society. What is higher purpose and how does it affect corporate governance? This paper defines higher purpose and surveys the literature in economics, finance, organization behavior and management strategy on organizational higher purpose. Key research questions addressed in these strands of the higher purpose literature are identified and the available insights are discussed and synthesized. Higher purpose is a contribution goal that is distinct from shareholder value maximization, but in firms that implement higher purpose effectively, decisions are made at the intersection of purpose and value maximization. Higher purpose is not charity, and it will worsen governance and fail to be sustainable when it is either viewed as charity or used merely for “virtue signaling”. Moreover, mandating the adoption of a higher purpose is generally unadvisable.

FELIX MORMANN, Texas A&M University School of Law, Stanford Law School
Email: mormann@law.tamu.edu
MILICA MORMANN, Southern Methodist University (SMU) - Marketing Department
Email: mmormann@smu.edu

Capital markets are cast as both villain and hero in the climate playbill. The trillions of dollars required to combat climate change leave ample room for heroics from the financial sector. For the time being, however, capital continues to flow readily toward fossil fuels and other carbon-intensive industries. Drawing on the results of an empirical study, this Article posits that ratings of corporate climate risk and governance can help overcome pervasive information asymmetries and nudge investors toward more climate-conscious investment choices with welfare-enhancing effects.

In the absence of a meaningful price on carbon, three private ordering initiatives are trying to mobilize capital markets as a force for good in the war on carbon. But shareholder climate activism, calls for better climate-related financial disclosures, and the divestment movement have yet to usher in the paradigm shift toward low-carbon capitalism.

Corporate climate ratings overcome existing information asymmetries to nudge investors toward more carbon-conscious allocation of their assets. Every year, rating agencies like Standard & Poor’s, Moody’s, and Fitch pass judgment on over one hundred trillion dollars’ worth of securities. Modeled after these well-established ratings of creditworthiness, independent ratings of companies’ climate risk and governance can redirect the flow of capital away from high-carbon assets toward more climate-friendly options—without the need for government authorization or other market-distorting interventions.

A series of survey experiments with over fifteen hundred participants test, and demonstrate, the capacity of corporate climate ratings to promote low-carbon investment. Inclusion of climate ratings among the performance metrics commonly considered by investors significantly increases investment in the stock of companies with favorable climate ratings, even when other stocks boast a stronger return profile. Variations in the ratings’ framing and format, informed by insights from behavioral economics and finance, facilitate recommendations for best practices.

OLIVER HART, Harvard University - Department of Economics, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: ohart@harvard.edu
LUIGI ZINGALES, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)
Email: luigi@chicagobooth.edu

In the last few years, there has been a dramatic increase in shareholder engagement on environmental and social issues. In some cases shareholders are pushing companies to take actions that may reduce market value. It is hard to understand this behavior using the dominant corporate governance paradigm based on shareholder value maximization. We explain how jurisprudence has sustained this criterion in spite of its economic weaknesses. To overcome these weaknesses we propose the criterion of shareholder welfare maximization and argue that it can better explain observed behavior. Finally, we outline how shareholder welfare maximization can be implemented in practice.