Law Writing

Profit and Purpose
– shareholder primacy and the promise of tomorrow

By on September 24, 2019

In 1919, Henry Ford’s attempt to lower car prices and increase wages of factory workers did not go down well with the company’s shareholders. The move would have an adverse impact on short-term profits and dividends. The Dodge brothers, minority shareholders and competitors, were particularly incensed and took legal action.

In the case that ensued (Dodge v Ford Motor Car Company), the Michigan Supreme Court held that “a business corporation is organized and carried on primarily for the profit of the stockholders”.

Over time, complimented by the intellectual panache of the likes of the Nobel Prize-winning economist Milton Friedman who argued that a company had no “social responsibility” to the public or society, shareholder primacy became sacrosanct.

On a political level, the governments of Margaret Thatcher and Ronald Reagan in the 1980s marked the end of New Deal thinking. Their core policies of privatization, deregulation and spending cuts ensured that neoliberalism was to become economic orthodoxy.

Maximization of profits and shareholder returns was enshrined as a corporation’s true purpose, its raison d’être.

In the shift from a world of ‘societies with markets’ to one of ‘market societies’, CEOs and shareholders replaced Kings and Czars as the “New Rulers of the World” – with corporations at the fulcrum of the changing tide.

As the predominant economic institution of our times, the scale of the modern corporation is staggering in its ubiquity: the clothes you wear, the apples you eat, the phone you use and the bed you sleep on are all produced by companies. If you happen to be among the two million people incarcerated in America, your “big house” may be owned and operated by a for-profit corporation.

There role of corporations, therefore, is pivotal in shaping tomorrow.

With the planet on the precipice of irreversible environmental damage, unprecedented levels of income inequality and demands for radical change getting ever louder, cracks in the wall of shareholder primacy are taking hold.

Corporate social responsibility has emerged as a new creed and environmental, social and governance (ESG) goals as a new mantra. Friedman’s brand of cynicism is derided as being old-fashioned and mean-spirited. There is talk of a new “Inclusive Capitalism” stemming perhaps from the fear that the broken system, unless fixed, may lead to something far worse.

Increasingly, funds are divesting their capital from companies falling short of social standards. About a third of global investable assets (USD $30 trillion) are now managed by socially responsible corporate vehicles. Recently, Blackrock CEO Larry Fink wrote to its companies demanding that purpose be twinned with profit.

100 years after the Ford case, in August 2019, the Business Roundtable, an influential group of CEOs of 181 of the world’s largest companies led by Jamie Dimon, indicated a crucial shift from the long-held position of shareholder primacy. They amended the language of their charter that “corporations exist principally to serve their shareholders” to pledging “a fundamental commitment to all of our stakeholders”. The list of stakeholders includes customers, employees, suppliers, communities and shareholders.

This is a significant step – taken in the same month as Greenland lost 11 billion tons of ice in a single day. There is an urgent need for businesses to ditch myopic shareholder-first thinking, urgently adopt the multi-stakeholder model and implement socially conscious policies if the planet is to have a fighting chance at survival and regeneration.

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Kamal K. Jabbar
Dubai

Kamal is a Partner with extensive banking, finance, corporate and commercial law experience in the MENA region. He is a barrister from the Honourable Society of Lincoln’s Inn, London, advises on contentious and non-contentious issues and multi-faceted, multi-jurisdictional matters.

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