The Purpose of a Corporation: A Brief History

What is the purpose of a corporation? Today, the standard answer is that a corporation’s purpose is to benefit its shareholders – academics speak of the “shareholder primacy norm,” and many talk of corporate managers’ task as “shareholder wealth maximization.” Even apparently selfless corporate acts, such as charitable donations, are justified as ultimately benefiting shareholders by producing a favorable image and so consumer goodwill.

But has this always been the case? Certainly, there’s always been a strand of thought that put shareholders first.  Readers may recall being assigned Dodge v Ford Motor Co., where in 1919 the Michigan Supreme Court declared that “a business corporation is organized and carried on primarily for the profit of the stockholders.”  Yet during the middle decades of the century — from the 1940s to the 1970s, an era that now appears an economic golden age marked by widely shared prosperity and globally dominant American corporations – many argued otherwise. Corporations appeared to have won such secure positions in the economy, and so many workforces and communities were dependent on giant corporations, that it no longer seemed right for corporations to be run just for shareholders—who, in an era of high retained earnings, no longer even provided the corporation capital. Increasingly popular was the vision of a corporation responsive to multiple groups.  In 1950, for instance, the management guru Peter Drucker urged that management be held responsible to the corporation itself, “rather than to any one group:  owners, workers, or consumers.”   In 1957, Harvard economist Carl Kaysen wrote that management should see “itself as responsible to stockholders, employees, customers, the general public, and, perhaps most important, the firm itself as an institution.” Managers should govern the corporation to benefit shareholders, they believed, but not shareholders alone.

This view was shared not only by scholars but, surprisingly, by many corporate executives. In 1949 General Foods’ president Clarence Francis told Congress that he had a “three-way responsibility to the American consumer, to our associates in this business, and to the 68,000 [stockholders in General Foods]. We . . . would serve (the company’s) interests badly by shifting the fruits of the enterprise too heavily toward any one of those groups.” Two years later, the president of Standard Oil of New Jersey claimed that managers needed “to conduct the affairs of the enterprise in such a way as to maintain an equitable and working balance among the claims of the various directly interested groups—stockholders, employees, customers, and the public at large.” So widespread were such views that, in 1959, one writer in the Harvard Business Review complained that it was no longer “fashionable for the corporation to take gleeful pride in making money.” Instead, he complained, it was typical “for the corporation to show that it is a great innovator; more specifically, a great public benefactor; and, very particularly, that it exists ‘to serve the public’.”

Even the law bent, at least a bit, toward this “social” view of corporate purpose. When the New Jersey Supreme Court upheld corporate charitable donations in its 1956 A.P. Smith Manufacturing Co. decision, it rested its judgment less on any benefit that would accrue to the company than on the belief that corporations had responsibilities beyond those owed to shareholders; corporations needed, the court held, to “acknowledge and discharge social as well as private responsibilities as members of the communities within which they operate.”

Single SkyscraperWhatever happened to the social view of the corporation? It still survives in some quarters, stoutly defended by a few academics, and some hint of it can also be found in the antitakeover statutes of the 1990s, intended to allow corporate boards to take into account non-shareholder constituencies (really, employees and communities) when fighting off a takeover offer. But for the most part, both popular culture and academics have now concluded that corporations are to be run for shareholders’ benefit—no more talk of taking into account the needs of multiple constituencies!

Much credit for this can be given to economic changes. In the 1970s and 1980s, American corporations faced stiff competition from abroad and economic stagnation at home, and the idea that they could play a prominent social role while staying competitive seemed improbable. Sclerotic corporate management came in for particular criticism, and the image of the “business statesman” common in the 1950s disappeared. New business and legal theories also played a role, as management was reconceived as the “agent” of the corporation’s “owners”—its shareholders—and share price seen as the best measure of whether these agents were doing their job.

By the turn of the twenty-first century, the conventional wisdom was that the corporation existed for its shareholders’ benefit. So ingrained is this view today that businesspeople who aim to combine profit with social mission have begun inventing new business entities to fulfill their visions, the low-profit limited liability company (L3C) and benefit corporation (B Corp) being the two most notable recent developments. It’s too early to tell whether these new legal forms will flourish; but they testify to the enduring desire for a business form with a purpose beyond shareholder enrichment.

6 thoughts on “The Purpose of a Corporation: A Brief History”

  1. I think a corporation’s first priority is to make a profit, but has some degree of social responsibility in return for society’s granting the the company’s owners (shareholders) a shield against liability. As a corporation grows in size, wealth/assets; I think the beneficiaries of profits should be somewhat re-prioritized to increase benefits to workers, consumers, and local communities (especially where towns or counties are largely dependent upon it’s jobs). Don’t think this would be easy to codify-perhaps only be aspirational. Corporate officers and managers should have personal legal liability and complainants not prohibited to avoid arbitration and proceed directly to Civil or Tort remedies.
    This is an upcoming item of discussion at our local library lifetime learners group. Any additional history, legal rulings, etc. that would be germane to a 2 hour discussion session would be welcomed!

    Reply
    • David
      Your article overlooks authors Adolf Berle and Gardiner Means who published The Modern Corporation and Private Property in 1932, making the case that corporations needed to balance the claims of different stakeholders, taking into account public policy and the needs of multiple constituencies, including employees, suppliers, local communities, creditors, and others.
      The political pendulum swings back and forth, but understanding how the changing climate and related economic impacts affect a business and the priorities of important customers and other stakeholders is fundamental to business.

      Reply
  2. How interesting that you talk about how corporations were built to benefit the shareholders but not just them. I am starting a new business this year and I want to be prepared legally. I will find a great business law attorney for this to have on backup.

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  3. hi, It is true! Today corporation’s purpose is to benefit its shareholders – Even selfless corporate acts, such as charitable donations, are justified as ultimately benefiting shareholders by producing a favorable image and so consumer goodwill. I am starting a new business this year and want to be legally ready. I would find a good business lawyer to back this up!

    Reply
  4. The definition of a “rat race” was provided by Aleksandr Solzhenitsyn:
    ““It based modern Western civilization on the dangerous trend to worship man and his material needs. Everything beyond physical well-being and accumulation of material goods, all other human requirements and characteristics of a subtler and higher nature, were left outside the area of attention of state and social systems as if human life did not have any superior sense. That provided access for evil, of which in our days there is a free and constant flow. Merely freedom does not in the least solve all the problems of human life, and it even adds a number of new ones…” Aleksandr Solzhenitsyn”
    Meanwhile, “The Corporation” is not “a man,” the corporation is a system designed to feed shareholders – Today’s largest “Shareholders” are other corporations – Vanguard, Blackrock, State Street. This is a self-eating watermelon.
    However – “The principal function of most corporations is not to maximize shareholder value, but to maximize the standard of living and quality of work life of those who manage the corporation.” (Russell Ackoff)
    Providing the shareholders with a return on their investments is a requirement, not an objective. As Peter Drucker observed, profit is to a corporation as oxygen is to a human being: necessary for existence, not the reason for it.
    (Ackoff) “The most valuable and least replaceable resource is time. Without the time of employees, money can produce nothing. Employees have a much larger investment in most corporations than their shareholders.”
    Thus, Corporations should be maximizing stakeholder, not shareholder, value to employees, customers, and shareholders.

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