Progressive Corporate Governance Under Social Capitalism: Do the Right Thing or Share the Wealth?

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This Article expands the idea of progressive corporate governance beyond the limitations entailed in the traditional debate over corporate purpose: should firms be operated for Shareholder Wealth Maximization (SWM) or for broader goods, today called Environmental, Social, and Governance (ESG) goals? In one form or another, “shareholder capitalists,” have debated with “stakeholder capitalists,” for over a century. In general, stakeholder capitalists have presented their conception of the firm’s purpose as “progressive.” This Article complicates that claim by arguing that both SWM and ESG may be understood as progressive, albeit under different understandings of the word “progressive,” different assumptions about the practicalities of corporate governance, and different understandings of today’s economy.

The circumstances of the debate over corporate purpose have changed. The contemporary U.S. economy is extremely financialized: shocks such as the Global Financial Crisis and the COVID-19 pandemic have demonstrated that institutions and individuals depend on the smooth functioning of the capital markets. Neither classical economics, on which shareholder capitalism relies, nor the tradition of social criticism, on which stakeholder capitalism depends, adequately frame this economy. Our situation is better understood in terms of “social capitalism.” Reversing Henry Sumner Maine’s famous dictum that progress is the movement from status to contract, human welfare in the United States is determined largely by station, in short, property.

Under social capitalism, a firm might be progressive in the way urged by stakeholder capitalists, by “doing the right thing.” Governance of such a firm should heed its active, influential shareholders, focusing on how the business operates. Alternatively, a firm might be progressive by “spreading the wealth” and democratizing participation in capital markets, both by individuals and institutions. Governance of such a firm practically requires delegation of control over assets to its board of directors and other fiduciaries, focusing on meeting society’s claims to economic output.

The question of what constitutes progressive corporate governance thus hinges on whether “progressive” is understood primarily in terms of operations and relatively few active shareholders, or in terms of wealth distribution and perforce delegated governance. In the age of social capitalism, the answer is likely both.

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Virginia Law & Business Review

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