Since the Great Recession of 2008, corporate profits have more than rebounded, and yet the rest of the American economy has struggled to recover. Widening income inequality and an erosion of social capital and economic trust has deprived capitalism of its moral high ground. The public has lost confidence in big businesses--asking what purpose they serve in society writ large.
In this paper, Steven Pearlstein argues we can begin to restoring the economic and moral legitimacy of American capitalism by reconsidering the purpose of corporations in American life. Despite the current dominance of the theory of “maximizing shareholder value,” this idea has little basis in history or law. Rather, the idea that the sole purpose of a corporation is to maximize profits for its shareholders took hold in the 1990s—through a combination of hostile takeovers, increased stock-based compensation for executives, and quarterly earnings guidance for Wall Street—and has since become imbedded in our basic financial infrastructure.
However, numerous scholars are beginning to question the shareholder primacy model, and consider modifications or alternatives that could get the economy back on the right track. Shifting to a more balanced form of capitalism will take time, but some possible steps for reform include:
- Support investment funds dedicated to long-term horizons, including socially responsible investment funds
- Recalibrate corporate governance law to allow for more flexible decision making
- Rebalance capital gains taxes to encourage long-term stock holding by investors
- Explore regulatory options for financial services, like a financial transaction tax to dampen the influence of short-term trading
- Encourage a wider range of corporate metrics beyond quarterly earnings guidance
- Reform shareholder voting rights to foster a sense of stewardship
Taken together, these measures could shift the focus from shareholder to customer primacy and from short term to long term horizons. The purpose of these reforms is not to impose an alternative yet equally rigid corporate focus, but to broaden the possible goals and purposes for CEOs and directors, and ultimately revitalize American capitalism.