A Necessary Shift from Shareholder Primacy toward Stakeholder-Conscious Governance in Light of Corporate Social and Environmental Responsibility
| Pages | 103-118 |
| Date | 01 October 2022 |
| Published date | 01 October 2022 |
| Author | Sophie Treacy |
A Necessary Shift from Shareholder Primacy
103
Cambridge Law Review (2022) Vol VII, Issue 2, 103–118
A Necessary Shift from Shareholder Primacy
toward Stakeholder-Conscious Governance
in Light of Corporate Social and
Environmental Responsibility
SOPHIE TREACY
ABSTRACT
As concerns over climate change continue to loom large in global economic policy,
increasing pressure is being mounted on corporate directors to counteract the
rapid environmental degradation that is occurring all across the world. The
traditional shareholder primacy model of corporate governance, however, fetters
the decision-making power of company directors to profit-maximising activities at
the expense of other stakeholders, such as customers, empl oyees, and the
environment. This inevitably gives rise to a tension between corporate governance
norms and sustainable, socially responsible governance. This article argues that, at
the level of doctrine, corporate purpose is undergoing a paradigm shift from
strictly shareholderist to stakeholder-conscious governance, prompted by a
growing number of social and environmental exigencies. The origins and
normative legitimacy of shareholder primacy will be explored, along with the
extent to which shareholderist governance can be reconciled with activities of
corporate social responsibility. It will be submitted that ultimately, shareholder
primacy is teetering on the brink of collapse, as the climate crisis demands
corporate purpose to evolve toward a much more holistic, stakeholder-conscious
model of governance.
Keywords: Corporate Governance; Environmental Social Governance; Corporate Social
Responsibility; shareholder primacy; climate change
BCL Candidate (Oxon), LLB (Trinity College Dublin). I am grateful to the anonymous reviewers fo r their
comments on earlier drafts. Any errors that remain are my own.
104
Cambridge Law Review (2022) Vol VII, Issue 2
I. INTRODUCTION
Is the role of the corporation in society to do well, or to do good? This question
neatly encapsulates the ethical quandary that resides at the heart of one of the most
enduring and spirited debates in corporate law theory. Despite being the subject
of a remarkabl e body of academic literature produced by generations of leading
corporate scholars, the question of what purpose the corporation should serve in
society has yet to be met with a definitive answer. In the absence of a sound
overarching teleology in respect of corporate purpose, a substantial amount of
resulting confusion has permeated corporate law theory. Differing perspectives on
whom corporations should fundamentally serve, whether that be its shareholders
or wider society, bear a direct impact on how corporations are governed, including
the extent to which compan y directors strive toward more socially responsible
governance at the expense of straightforward shareholder profit-maximisation.
How the interests of shareholders, stakeholders and wider society are reconciled
within company operations never remains static but rather oscillates betw een
shareholderist and stakeholderist orientated paradigms, often spurred on by
scandals in corporate governance or times of crisis. Thus, the shareholder primacy
norm that is currently said to dominate corporate governance in the United States
and United Kingdom is highly susceptible to change. This article argues that the
current model of shareholder primacy in corporate governance is on the brink of
collapse and is no longer sustainable as the climate emergency, along with man y
other societal factors, move to the centre of the economic and political agenda. In
light of this, it suggests that a shift toward a more “stakeholder-conscious” model
of governance could draw corporate law theory into line with reality. Section II
profiles the rise of the shareholder primacy norm within corporate governance
and draws on empirical studies to demonstrate that whilst it does permit a degree
of strategic and profitable endeavours of corporate social responsibility (CSR), it
ultimately limits its full implementation. Section III questions the normative
power of shareholder primacy in present day corporate governance and examines
how greater consideration of stakeholder interests would widen the scope for
company directors to engage with CSR. Following from this analysis, it will be
submitted that pure shareholder profit maximisation is growing progressively out
of touch with corporate governance practice at a time when it is increasingly
unacceptable for corporations to simply do well on behalf of their shareholders.
They must do good also.
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