There have been countless studies of corporate social responsibility and ESG across many disciplines. Law, economics, business administration and management, sociology, ethics, and theology, among others, have all made contributions. One might hope that a compelling business case for either corporate social responsibility/ESG or shareholder value maximization would have emerged from all that work. In fact, however, the results have been all over the map.

Proponents of stakeholder capitalism claim that it can be implemented simply by modifying the fiduciary duties of directors so that they can take into account the interests of stakeholders rather than being legally limited to considering shareholder value maximization. Such claims fundamentally misunderstand how deeply embedded shareholder value maximization is in corporate law. Only shareholders get to vote, which means directors get to keep their jobs only if they please shareholders. A web of director and officer fiduciary duties inclines them to shareholder value maximization, as does the law of executive compensation.

One of the key claims of advocates of stakeholder capitalism, especially those in the legal academy, is that the foundational case – Dodge v. Ford Motor Co. – was not good law when it was first written, the key part of the decision, is mere dicta, and subsequent legal developments have undercut whatever validity the decision may have had at one time. All of these claims are demonstrably false. As Chief Justice Leo Strine put it, those who claim that shareholder value maximization is not the law are pretending.

Shareholder value maximization is the law. It ought to be the law. This is, in part, because the chief alternative available in liberal democratic societies – stakeholder capitalism – is fundamentally flawed. If executives such as those who signed the Business Roundtable’s 2019 statement on corporate purpose really tried to run their companies according to the altruistic principles laid out therein, they would find it an impossible task. Developing the set of objective and quantifiable metrics necessary to operationalize stakeholder capitalism will prove an intractable problem. Even if the requisite set of metrics could be designed, boundedly rational managers cannot reasonably be expected to balance the huge number of competing factors necessary to account for the varied interests of the firm’s many constituencies.

The business corporation is just one of many types of corporations, each of which typically has its own statute. Since 2010, 35 states have adopted statutes creating a new form of corporation: the public benefit corporation (PBC). Although the details vary somewhat from state to state, in general PBC statutes are intended to provide a limited liability entity through which for-profit businesses could lawfully pursue stakeholder capitalism and ESG without running afoul of the shareholder value maximization rule. The availability of PBCs as an alternative to the traditional business corporation could alleviate the growing pressure on the latter to pursue ESG, since they provide an alternative by which social justice activists can pursue their ESG goals while still making a profit. In any case, the widespread adoption of PBC statutes confirms that Dodge is corporate law’s general rule. After all, if Dodge were not the law, PBCs would be unnecessary. Boards of business corporations would be free to pursue public benefits without violating their fiduciary duties. The perceived need for PBC statutes suggests that boards are not free to do so absent the statute.

There are four basic arguments in favor of stakeholder capitalism. (1) It is a necessary response to the externalities generated by corporations. (2) Society expects business to solve problems when governments will not. (3) Corporations have too much power. (4) Millennials will only work for woke corporations. None of these arguments proves persuasive.

AP Smith Mfg. Co. v. Barlow is the seminal case on the fiduciary duties of corporate directors with respect to profit maximization and corporate philanthropy. The chapter provides the factual context of the case and analyzes the law. The chapter situates the case in the famous debate between Adolf Berle and E. Merrick Dodd over shareholder value maximization. It provides context for the business communitys approach to shareholder capitalism.

There are very few cases holding directors liable for failing to maximize shareholder value. The reason is the business judgment rule, a corporate law doctrine that precludes judges from reviewing the merits of director decisions absent some evidence of fraud, illegality, self-dealing, failure to make an informed decision, or waste of corporate assets. Shlensky v. Wrigley is the classic case of the business judgment rules application to cases in which the directors are alleged to have failed to maximize profit.

Defines the terms corporation, corporate purpose, shareholder value maximization, stakeholders, stakeholder capitalism, corporate social responsibility, and ESG (environmental, social, and governance). Provides the plan of the work.

Stakeholder capitalism results in a loss of accountability, as executives who are responsible to everyone are responsible to no one. Stakeholder capitalism would be extremely difficult to implement. Proposed means of doing so – such as constituency boards, codetermination, and team production – are all unworkable. Stakeholder capitalism is inconsistent with democratic capitalism. Shareholder value maximization is the result that would emerge if shareholder and stakeholders could bargain (the so-called hypothetical bargain). Shareholder capitalism is pro-social. The profit motive results in socially efficient resource allocation. The profit motive is an essential motivational spark for innovation. The profit motive promotes freedom.

Dodge v. Ford Motor Co. is the seminal case on the fiduciary duties of corporate directors with respect to profit maximization. The chapter provides the factual context of the case and analyzes the law.