"Enlightened Shareholder Value": Corporate Governance Beyond the Shareholder-Stakeholder Divide

I. INTRODUCTION II. INSTITUTIONAL INVESTOR ACTIVISM: PANDORA'S BOX? A. Institutional Investor Power and the Rise of Shareholder Democracy B. The Problem of Stakeholders III. STAKEHOLDERS UNDER CORPORATE LAW A. Shareholder Wealth Maximization B. Control of the Firm C. Shareholder Preeminence IV. DEFINING AND DRIVING ENLIGHTENED SHAREHOLDER VALUE: PATHWAYS BEYOND THE SHAREHOLDER-STAKEHOLDER DIVIDE A. Enlightened Shareholder Value Under the U.K. Companies Act B. Investor-Driven Enlightened Shareholder Value 1. Expressions of Enlightened Shareholder Value: ESG Risk Management & the United Nations Principles for Responsible Investment 2. The ESG Rationale a. Firm-Level Risk Management and Financial Performance b. Portfolio-Level Risk Management and Financial Performance 3. Implementation & Diffusion a. Institutional Investors & Enlightened Shareholder Value b. Translating Enlightened Shareholder Value to Firms i. Litigation ii. Voting & Engagement V. SHAREHOLDER ENLIGHTENMENT AND THE CORPORATE OBJECTIVE FUNCTION A. Enlightened Shareholder Value: Revising the Corporate Objective Function 1. The Enlightened Shareholder Value Alternative: Distilling Decision Rules a. Enlightened Shareholder Value & Shareholder Wealth Maximization b. Enlightened Shareholder Value Decision Standards i. Long-Term Firm Value or "Joint Output" ii. Two-tier Constrained Optimization 2. Enlightened Shareholder Value Decision Rules Under Corporate Law B. Normative Advantages of Enlightened Shareholder Value 1. Of Law and Markets 2. The Nature of the Corporate Contract 3. Of Means and Ends 4. Stakeholder Representation C. Enlightened Shareholder Value & The "Problem" of Stakeholders: Responding to Efficiency-based Concerns 1. "Too Little" Attention to Stakeholders 2. "Too Much " Attention to Stakeholders a. A Response to the "Two Masters" Problem b. A Response to the Problem of Private Interests VI. CONCLUSION The global financial crisis has led to calls for greater corporate accountability and heightened controls over public corporations. As a result, the past year has seen a marked increase in regulatory initiatives that give shareholders a greater voice in corporate affairs, While debate continues to rage in the academy and beyond over the promise and pitfalls of these measures, an important undercurrent in the controversy is the potential impact of "shareholder democracy" on corporate stakeholders. This Article urges a vision of the corporation and its purpose that transcends the shareholder-stakeholder divide. Under this "enlightened shareholder value" (ESV) approach, which has been introduced statutorily in the United Kingdom, attention to corporate stakeholders, including the environment, employees, and local communities, is seen as critical to generating long-term shareholder wealth, This Article observes that a similar paradigm is being advanced in the United States by leading institutional investors who also identify stakeholder interests as key to long-term firm financial performance and effective risk management, It moves beyond prior literature by articulating a statement of the corporate purpose that is consistent with this investor-driven enlightened shareholder value approach and presents normative arguments in its favor, The Article then considers how enlightened shareholder value intersects with existing corporate governance rules in the United States and whether it implies managerial decision rules that align with or part course from the standard shareholder wealth maximization norm, In so doing, it offers a response to some of the concerns surrounding corporate stakeholders that have been raised by skeptics of greater shareholder voice. …