Report

The Problem of Corporate Purpose

Lynn A. Stout

In a new paper, Lynn A. Stout, questions the purpose of the modern public corporation. Is it to maximize shareholders’ wealth? Or are other goals, like serving customers or providing innovative products, valued in their own right?

Stout looks at the history of corporations and their attitude towards shareholder wealth and outlines how this relatively new notion of shareholder value thinking gets the law, economics and evidence wrong.

Stout explains that the current predominant view is that the purpose of corporations is to increase stock price, despite the fact that this shareholder value ideology is a relatively new development in the business culture. It is not supported by the traditional rules of American corporate law; is not consistent with the real economic structure of business corporations; and is not supported by the bulk of the empirical evidence on what makes corporations and economies work.

Indeed, there is good reason to suspect that focusing on “shareholder value” may in fact be a mistake for most business firms. This is because there is no single shareholder value—different shareholders have different needs and interests depending on their investing time frame, degrees of diversification and interests in other assets, and perspectives on corporate ethics and social responsibility. This ultimately harms most shareholders themselves—along with employees, customers, and communities.

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