Question

What role do business schools play in reinforcing shareholder primacy and should they change that?

Answer 1

Shareholder primacy—not a legal requirement but a social norm—seeks to maximize the interests of shareholders over those of any socially responsible mission. The authors consider how the corporation might embrace a wider responsibility that addresses multiple interests, including those of nonshareholder stakeholders, as well as the role of business schools in affording students additional perspectives on the role of the corporation.

Long considered the primary, if not sole, purpose of the corporation, maximization of shareholder value to the exclusion of any social mandate has not always gone as planned.

Business schools bear substantial responsibility for teaching their students the supremacy of shareholder interests, a theme that may often inform students’ conduct when they enter the business world and seek leadership positions where their compensation is linked to company share price. A core business school topic—the principal–agent model of the corporation—describes managers acting as agents in the service of shareholders (or principals) entitled to residual claims of a firm’s financial returns (i.e., share value). The pervasiveness of shareholder primacy was manifest in the Great Recession. Widening the tent to include such alternative perspectives on the corporation as stakeholder theory and social contract theory would serve future corporate leadership well and promote greater social awareness.

Changes that promote more socially responsible corporate governance have come, albeit slowly. Giving voting rights to nonshareholder stakeholders is fraught with challenges that range from properly identifying such relevant stakeholders to determining whether each individual within a stakeholder organization may vote and how to weigh stakeholders’ votes. A solution that has gained more traction is the B Corporation, a standard that certifies a company’s adherence to social and environmental responsibility in its conduct of business. Enacted through legislation in more than 20 US states, the B Corporation is bound by a fiduciary duty to consider the interests of nonshareholder stakeholders but does not extend voting rights to them.

Shareholder activists, behavioral finance economists, financial educators, and business school faculty and leadership might consider the benefits of viewing a corporate mission that goes beyond the pursuit of profit to encompass a wider and more compassionate mission.

Nevertheless, business educators need to consider how today’s corporation can do well while doing good. In a brave new world that values social consciousness, corporate social responsibility and the pursuit of profit need not be mutually exclusive.