The Rhetoric of Corporate Law - by Leslie...

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The Rhetoric of Corporate Law:

The Impact of Stakeholder Rhetoric on Corporate Norms

Lisa M. Fairfax∗

I. INTRODUCTION ........................................................................................................ 676 II. THE BATTLE OF NORMS: THE EVOLUTION OF THE SHAREHOLDER PRIMACY AND

STAKEHOLDER THEORIES...................................................................................... 679 A. Stakeholder Theory Reconsidered.................................................................... 679 B. The Persistence of Shareholder Primacy Rhetoric........................................... 681 1. The Case for Shareholder Primacy’s Dominance....................................... 682 2. The Rebuttal ................................................................................................ 683 3. The Reaffirmation ....................................................................................... 687 C. Concluding Assessments .................................................................................. 690 III. THE EVIDENCE ON STAKEHOLDER RHETORIC.......................................................... 690 A. Corporate Documents and Websites ................................................................ 691 B. Codes of Conduct ............................................................................................. 694 C. Corporate Infrastructure.................................................................................. 694 D. Business Schools and MBA Students ............................................................... 695 E. Corporate Organizations and Scholars............................................................ 696 F. Reflections on Stakeholder Rhetoric ................................................................ 696 IV. THE IMPACT OF STAKEHOLDER RHETORIC ON CORPORATE NORMS ........................ 698 A. Towards a Definition of Corporate Rhetoric ................................................... 699 B. The Meaning of the Message............................................................................ 702 C. The Relevance of Audience .............................................................................. 705 1. Pinpointing the Audience and Purpose of Rhetoric .................................... 706 a. Judiciary and Federal Regulators .......................................................... 706 b. Customers............................................................................................... 707 c. Employees—Current and Future ............................................................ 708 2. Rhetoric by Any Other Name... ................................................................... 709 3. Rhetoric Aimed at Investors and the Business Community ......................... 710 D. Short-Term Life of Rhetoric ............................................................................. 710 E. Concluding Thoughts on the Normative Impact of Stakeholder Rhetoric ........ 711 V. CONCLUSION ........................................................................................................... 711 APPENDIX A: DATA ON STAKEHOLDER RHETORIC IN FORTUNE 100 COMPANIES ........ 713

∗ Associate Professor of Law, University of Maryland School of Law. I would like to thank Hillary Sale for inviting me to participate in such a wonderful event as well as all of the other panelists and participants in the symposium, particularly Robert Clark, for their helpful comments and suggestions on earlier versions of this draft. In addition, I would like to thank Danielle Citron, Roger A. Fairfax, Jr., Sarah Barringer Gordon, Michael Knoll, Kristen Madison, David Skeel, Amy Wax, R. Polk Wagner, and Cynthia Williams for their insights and suggestions. Special thanks to Sarah Kotula for her invaluable research assistance.

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676 The Journal of Corporation Law [Spring

Table 1 .................................................................................................................. 713 Table 2 .................................................................................................................. 716

I. INTRODUCTION

A long-running debate exists in corporate law between those who believe the corporation’s sole or primary purpose is to maximize shareholder profit, the “shareholder primacy” theory, and those who believe a corporation must honor all of its constituents’ interests, including the concerns of employees, creditors, customers, and society at large, the “stakeholder” theory.1 This debate has received prominent attention since 1932 when Professors Berle and Dodd debated the merits of these contrasting theoretical approaches in the Harvard Law Review.2 One of the themes of Professor Robert Clark’s treatise, Corporate Law, centers on the powers and purpose of the corporation,3 and Professor Clark concludes, like most others, that the shareholder primacy norm dominates corporate law.4 In an effort to shed light on the continuing viability of that conclusion, this Article examines the debate through the prism of recent corporate scandals, which have precipitated an increase in rhetoric, particularly within corporate documents, that embraces the stakeholder theory.

For the past few decades, corporate scholars have agreed almost universally that the shareholder primacy norm most accurately captures the corporation’s personality and purpose.5 Even proponents of the stakeholder theory grudgingly agree.6 Interestingly, legal doctrine seemingly has retreated from a strict requirement that corporations

1. William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14 CARDOZO L. REV. 261, 264 (1992) (explaining the competing conceptions of corporate law that have dominated our society). See, e.g., Henry N. Butler & Fred S. McChesney, Why They Give at the Office: Shareholder Welfare and Corporate Philanthropy in the Contractual Theory of the Corporation, 84 CORNELL L. REV. 1195, 1195 (1999) (noting that the issues have been debated ad nauseam). 2. See Adolf A. Berle, Jr., For Whom Corporate Managers are Trustees: A Note, 45 HARV. L. REV. 1365, 1367 (1932) (arguing that corporations exist to enhance shareholder profit); E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 HARV. L. REV. 1145, 1147-48 (1932) (pinpointing a corporation’s responsibilities to all corporate constituents and broader society). See also A.A. Sommer, Jr., Whom Should the Corporation Serve? The Berle-Dodd Debate Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33 (1991) (same); Joseph L. Weiner, The Berle-Dodd Dialogue on the Concept of the Corporation, 64 COLUM. L. REV. 1458 (1964) (same As what?); C.A. Harwell Wells, The Cycles of Corporate Social Responsibility: An Historical Retrospective for the Twenty-First Century, 51 U. KAN. L. REV. 77, 82-96 (2002) (debating the purpose issue). This debate has its roots in the 1920s. See Sommer, supra, at 36-37; Wells, supra, at 83-87. 3. See ROBERT C. CLARK, CORPORATE LAW 33 (1986) (discussing the competing shareholder and stakeholder theories); Id. at 675-703 (discussing the meaning of corporate personality). 4. See id. at 682 (noting courts have not retreated from the assumption that the primary or residual purpose of a business corporation is to make profits for its shareholders). 5. CLARK, supra note 3, at 282; Stephen Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U. L. REV. 547, 563 (2003) (noting that most scholars embrace some variant of shareholder primacy); See Ronald Chen & Jon Hanson, The Illusion of Law: The Legitimating Schemas of Modern Policy and Corporate Law, 103 MICH. L. REV. 1, 37 (2004) (noting the resurgence of shareholder primacy since the 1970s). 6. See Kent Greenfield, New Principles for Corporate Law, 1 HASTINGS BUS. L. J. 89, 89 (2005) (noting the dominance of the shareholder primacy model); Jill Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy 10 (Univ. of Cal., Berkeley Law & Econ. Workshop Paper No. 5, 2004), available at http://repositories.edlib.org/berkeley_law_econ/Spring/2005/5 (finding resounding support for shareholder primacy).


2006] Rhetoric of Corporate Law 677

maximize shareholder wealth in all settings. In response, some corporate scholars have concluded that the shareholder primacy theory may no longer be a normatively nor descriptively accurate assessment of the current state of corporate law.7 Despite this seeming shift in positive doctrine, scholars on both sides of the debate continue to proclaim the dominance of the shareholder primacy norm.

Recently, however, some traditional corporate scholars, along with many corporate directors and officers, have adopted rhetoric that suggests the stakeholder model has gained broader acceptance. For example, in January 2005 The Economist featured a series of articles acknowledging that stakeholder rhetoric had begun to eclipse the rhetoric involving the shareholder primacy norm.8 It has done so not only through the permeation of such rhetoric in corporate documents, such as annual reports and mission statements, but also through a proliferation of officers, board committees, and even entire departments dedicated to overseeing and implementing policies that address stakeholder issues.9 Business school curricula also emulate this trend, integrating such concepts in core and extracurricular courses, and in the increasing desire by MBA students to fuse social endeavors with profit-making ones.10 Then too, some traditional scholars have embraced some aspects of stakeholder rhetoric,11 while some business organizations now include stakeholder concepts in their model principles of good corporate governance.12

Nonetheless, because the embrace of stakeholder rhetoric appears inconsistent with the reality of corporate practices, both critics and proponents of the stakeholder theory tend to dismiss this shift to stakeholder rhetoric as relatively insignificant. Pointing out that many corporations ultimately devote very little time and resources to issues involving constituents other than shareholders, commentators agree that the stakeholder rhetoric appears to be mere “window dressing” for the real goal of maximizing shareholder profit.13

The surge in stakeholder rhetoric does indeed appear to reflect a desire by corporations to present the image of good citizens as a counter to the negative images created by corporate misconduct reflected in Enron and other recent corporate scandals. Given these factors, critics and proponents agree that the stakeholder rhetoric represents an insignificant distraction, and conclude that the shareholder primacy norm remains safe from encroachment.

This Article argues that the recent corporate embrace of stakeholder rhetoric has normative implications that both critics and proponents have overlooked. Leaving aside the possibility of any behavioral impact,14 this Article asserts that corporate adoption of

7. Margaret M. Blair & Lynn A. Stout, Director Accountability and the Mediating Role of the Corporate Board, 79 WASH. U. L.Q. 403, 406 (2001). 8. The Ethics of Business, ECONOMIST, Jan. 22, 2005, at 20; The Good Company, ECONOMIST, Jan. 22, 2005, at 3; The Good Company: Capitalism and Ethics, ECONOMIST, Jan. 22, 2005, at 11; The World According to CSR, ECONOMIST, Jan. 22, 2005, at 10; Profit and the Public Good, ECONOMIST, Jan. 22, 2005, at 15. 9. See Part III.A. 10. See Part III.D. 11. See infra notes 154-55 and accompanying text (discussing among others, Ira Millstein and Sir Adrian Cadbury). 12. See id. 13. See infra note 170. 14. Although beyond the scope of this Article, the author plans to explore the behavioral impact of corporate rhetoric in future scholarship.



such rhetoric may signal a growing dissatisfaction with the shareholder primacy norm, particularly in its absolute form.

Indeed, the fact that stakeholder concepts have received some prominence within corporate documents begs the following question: Why do corporate agents feel obliged to advance rhetoric at odds with both their own actions and the “prevailing” corporate norm of shareholder primacy and profit maximization? This Article responds to that question, arguing that society, including investors, may find the stakeholder norm more palatable, particularly during times of corporate misbehavior when society perceives the profit maximization norm as having generated that behavior.

In doing so, this Article articulates a definition of corporate rhetoric that not only relies on the Aristotelian understanding of rhetoric as persuasive discourse, but also illuminates the expressive function of such rhetoric within judicial opinions regarding corporate conduct. Although some scholars have emphasized the expressive function of rhetoric within judicial opinions and its importance in shaping corporate norms of behavior,15 those scholars have not assessed the normative impact this rhetoric has on corporations and the business community.

This Article fills that void by extending the scholarly discussion of corporate rhetoric to include rhetoric advanced by the corporate community itself.16 This Article asserts that, like judicial opinions, rhetoric espoused by the business community has an intrinsic value irrespective of its behavioral impact, and, in part, can be viewed as a direct response to judicial decisions.17 Such rhetoric represents an expression of the discourse corporations believe audiences, such as the judiciary and federal regulators, find most palatable. Given that expression, this Article concludes that even if shareholder primacy reflects the positive reality of corporate practices, the rhetorical embrace of stakeholder principles suggests corporate perception that audiences do not fully endorse the normative claim that shareholder primacy ought to govern corporate conduct.

Part II of this Article sets forth the principles animating the stakeholder theory. It then reveals the dominance of the shareholder primacy rhetoric in corporate law, illustrating its persistence in the face of legal doctrines that erode the normative weight of the shareholder primacy theory. Part III pinpoints the manner in which corporations have increasingly adopted stakeholder rhetoric, demonstrating how that rhetoric has permeated the corporate environment from corporate documents and infrastructures to business

15. See SANFORD LEVINSON, The Rhetoric of the Judicial Opinion, in LAW’S STORIES 18 (Peter Brooks & Paul Gewirtz, eds. 1996) (describing opinions as rhetorical performances); Sean J. Griffith, Good Faith Business Judgment: A Theory of Rhetoric in Corporate Jurisprudence, 55 DUKE L.J. 1, 8 (noting that rhetoric is a speech act); Edward B. Rock, Saints & Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L. REV. 1009, 1016 (1997) (noting that Delaware courts generate standards of legal conduct through “corporate law sermons” that influence the development of social norms). 16. By analyzing rhetoric within judicial opinions, Professor Griffith advances a theory of corporate rhetoric that relies on the rhetoric within judicial opinions. See Griffith, supra note 15, at 8. Under his theory, judges use rhetoric to respond to the corporate environment, and hence the rhetoric is not static, but rather shifts as the environment shifts. See id. at 56. Professor Griffith refers to this shift as a thamathrope. See id. By examining corporate rhetoric from the perspective of the rhetoric within corporate documents and espoused by the business community, and emphasizing the responsive nature of that rhetoric, this Article’s conception of corporate rhetoric compliments and expands upon Professor Griffith’s theory. 17. Professor Rock notes that rhetoric within shareholder litigation plays a role in elaborating norms, separate from the deterrence role of such litigation. See Rock, supra note 15, at 1089-90.



school curricula and related activity. That demonstration is based in part on empirical research the author conducted on the presence of stakeholder rhetoric within Fortune 500 corporations. Part IV defines corporate rhetoric as corporate expression of the most persuasive and acceptable normative model for corporate conduct. In this regard, although that rhetoric may not reflect corporations’ actual behavior, it sheds light on corporate understanding of the kind of behavior in which they should engage. Part IV concludes that because corporate rhetoric relies heavily on stakeholder themes, it ultimately reveals its dissatisfaction with the shareholder primacy norm.

II. THE BATTLE OF NORMS: THE EVOLUTION OF THE SHAREHOLDER PRIMACY AND STAKEHOLDER THEORIES

This Part explores the relative strength of the shareholder primacy norm. Section A defines this Article’s understanding of the stakeholder theory. Section B reveals the historical dominance of the shareholder primacy theory, while illustrating the persistence of shareholder primacy rhetoric despite legal doctrine that appears to undermine the shareholder primacy norm.

A. Stakeholder Theory Reconsidered

To fully examine the prevalence and impact of stakeholder rhetoric on norms and corporate behavior, it is important to articulate the principles underlying that rhetoric. To be sure, this is no easy task. Indeed, the notion of corporate responsibility to stakeholders not only has undergone many different titles,18 but also means different things to different scholars.19 This level of ambiguity may reflect one reason why its critics tend to dismiss the stakeholder theory as unpersuasive.20 By contrast, the shareholder primacy theory, with its tidy focus on one group, appears to be a relatively simple and agile concept to define and apply.21

18. Indeed, some refer to the notion of obligations to constituents as corporate social responsibility. See Wells, supra note 2, at 78. Others refer to the theory as the “social entity” concept. See Allen, supra note 1, at 264; Lisa M. Fairfax, Doing Well While Doing Good: Reassessing the Scope of Directors’ Fiduciary Obligations in For-Profit Corporations with Non-Shareholder Beneficiaries, 59 WASH. & LEE L. REV. 409, 411-12 (2002). 19. See Wells, supra note 2, at 99-134 (discussing cycles of stakeholder concept). Reflective of this difference are constituency statutes, some of which only embrace a responsibility to specific groups like employees, suppliers, and creditors, while others focus on a responsibility to the economy of the state and nation. See Fairfax, supra note 18, at 460-61. 20. More fundamentally, when its proponents cannot succinctly define its content, it becomes difficult to enforce a coherent obligation for directors. Even if such an obligation could be sustained, allowing directors to focus on a variety of different groups’ interests also makes it relatively easy for directors to avoid all liability since they can always convincingly claim that their actions advance some group’s interest. See, e.g., Stephen M. Bainbridge, In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green, 50 WASH. & LEE L. REV. 1423, 1435-42 (1993) (referring to the difficulty of serving a variety of constituents as the “two masters” problem); Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Constituency Statutes, 70 TEX. L. REV. 579, 589 (1992) (noting concern that stakeholder theory creates difficulty with enforcing obligations and measuring success). 21. See Bainbridge, supra note 20, at 1435-38 (pinpointing the difficulties with adopting the stakeholder model which requires a balancing of various interests). See also CLARK, supra note 3, at 680 (noting that there is “no truly persuasive critique” of the “view that strict profit maximization promotes better monitoring and



This Article identifies the stakeholder theory as viewing corporate responsibility as a balance of the interests of all corporate constituents, even when that balance does not maximize profits.22 This theory recognizes that corporations should attend to community interests by devoting resources to charitable causes. But it also extends the conception of the “stakeholder” to encompass the concerns of non-shareholder constituents, including employees, creditors, customers, and the larger society. To that end, this theory reflects the notion that corporations should devote resources to social and environmental issues that affect the broader (even global) society, while refraining from practices that have a negative impact on such issues.

This conception of the stakeholder model does not require that corporations abdicate their profit-making role. Indeed, such a conception does not advocate that corporate entities should be converted into non-profits whose sole responsibility is to dedicate resources to external groups.23 In this respect, many critics of the stakeholder theory misconceive this approach as an attempt to completely subordinate a corporation’s profit-making concerns. Under the definition advanced here, the stakeholder theory advocates that corporations achieve a better balance of all interests, while underscoring the importance of corporations’ willingness to subordinate or abandon their concerns for profit when appropriate.24

enforcement of a corporation’s economic performance”). 22. In this sense, the definition captures the notion put forth by Clark that a corporation’s residual goal should extend to a wider set of interests. See CLARK, supra note 3, at 688. 23. See Wells, supra note 2, at 80 (stating “advocates of corporate social responsibility aim to reform corporate power, not eliminate it”). 24. Some scholars have asserted that such an articulation of the stakeholder theory produces little or no tension with the shareholder primacy theory appropriately understood because most actions benefiting other constituents concomitantly inure to the long-term financial benefit of the corporation. See Chen & Hanson, supra note 5, at 46-48 (explaining scholars who view the two theories as aligned and concluding that such scholars offer some compelling arguments in support of that view). This Article disagrees with that assertion. See id. at 49 (noting skepticism of the “shared interest” script). Indeed, there may be some actions that advance other constituents’ interests while simultaneously maximizing long-term profit. However, it seems unreasonable to assume that all such actions align perfectly with profit-making considerations. Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. REV. 733, 745 (2005). Moreover, there are clear cases where the profit-making goal appears inconsistent with the advancement of other interests. For example, many advocates of corporate diversity have insisted that racial and ethnic diversity positively contributes to the corporation’s bottomline. See, e.g., Lynne L. Dallas, The New Managerialism and Diversity on Corporate Boards of Directors, 76 TUL. L. REV. 1363, 1403-04 (2002) (noting that the movement for diversity on corporate boards has the potential to counter a corporate environment focused exclusively on stock price); Marleen A. O’Connor, The Enron Board: The Perils of Groupthink, 71 U. CIN. L. REV. 1233, 1306-08 (2003) (noting that Enron suggests that diversity may enhance board effectiveness); Steven Ramirez, Diversity and the Boardroom, 6 STAN. J.L. BUS. & FIN. 85 (2000) (outlining the importance of diversity to American businesses generally and boards of directors in particular). However, the evidence on this point is mixed at best. Certainly there exists some anecdotal support for the proposition that increased diversity enables corporations to access broader and more diverse markets and hence increase its profit. However, diversity beyond mere tokenism may entail significant costs without any reciprocal benefit. In fact, recent studies suggest that at least in the foreseeable future, a genuine increase in diversity within the employee, executive, and board ranks may exacerbate tension between racial groups, and reduce cohesion within the employment environment thereby possibly creating costly disputes between employees. See Devon W. Carbado & Mitu Gulati, The Law and Economics of Critical Race Theory, 112 YALE L.J. 1757, 1798-1802 (2003) (noting the transaction costs associated with workplace diversity and that such costs may not be ameliorated in the near future). In addition, as workplace diversity increased, the number of



B. The Persistence of Shareholder Primacy Rhetoric

Historically, two perspectives reign regarding the normative role of the corporation.25 The first favors the shareholder primacy model and contends that the primary, if not sole, obligation of corporate decisionmakers should be to maximize the profit of its shareholders.26 The second embraces the stakeholder theory.27

As early as 1930, Professor Adolf Berle and Professor Merrick Dodd debated the merits of the two theories.28 Professor Berle argued that corporate directors and officers held shareholders’ property in trust for the shareholders’ sole benefit,29 and hence the exclusive province of directors and officers was the maximization of shareholders’ property, that is, their wealth.30 In contrast, Professor Dodd argued that corporate officers and directors serve as trustees for the corporate enterprise rather than for individual shareholders.31 This role enabled them to legitimately use corporate resources to address the interests of other constituents and behave in a socially responsible manner.32

Since Professors Berle and Dodd’s exchange, the contours of the debate regarding the corporation’s obligations have evolved, with corporate scholars advancing different rationales for favoring one theory over the other.33 The crux of that debate, however, has

racial harassment claims filed with the Equal Employment Opportunity Commission (EEOC) increased five-fold from the 1980s to the 1990s. See The U.S. Equal Employment Opportunity Commission, Trends in Harassment Charges Filed with the EEOC, http://www.eeoc.gov/stats/harassment.html (last visited March 26, 2006). In this regard, the promotion of genuine racial diversity may entail significant costs that appear antithetical to profit maximization. However, that promotion would be encouraged under the stakeholder theory because that theory recognizes the need to subordinate financial considerations in order to advance important societal objectives. This example highlights the fact that the stakeholder theory and long-term profit maximization are not always compatible. 25. See Allen, supra note 1, at 264 (explaining the two conceptions of corporate law that have dominated our society). Professor Clark actually pinpoints “five major clusters of views concerning the corporation’s” role. See CLARK, supra note 3, at 677. This Article would consider the two principal conceptions of the corporation to be attributed to what Professor Clark refers to as dualism (the residual obligation of profit maximization) and high idealism (interest group accommodation). See id at 677-81, 688-94. 26. See Berle, supra note 2, at 1367 (emphasizing that corporations exist to enhance shareholder profit); Milton Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. TIMES, Sept. 13, 1970, § 6 (Magazine), at 33. 27. See William W. Bratton, The Economic Structure of the Post-Contractual Corporation, 87 NW. U.L. REV. 180, 208-15 (1992) (discussing stakeholder theory); Timothy L. Fort, The Corporation as Mediating Institution: An Efficacious Synthesis of Stakeholder Theory and Corporate Constituency Statutes, 73 NOTRE DAME L. REV. 173, 184-86 (1997). 28. See Berle, supra note 2, at 1367; Dodd, supra note 2, at 1147. For a discussion of the debates see supra note 2. 29. See William W. Bratton, Berle and Means Reconsidered at the Century's Turn, 26 J. CORP. L. 737, 762-65 (2001) (explaining Berle's trust theory); Berle, supra note 2, at 1367. 30. Berle, supra note 2, at 1367. 31. Dodd, supra note 2, at 1160. 32. Id. at 1161. 33. Indeed, scholars in the 1980s, relying on a neoclassical economic mode of analysis, utilized a “nexus of contracts” theory to justify the corporate focus on shareholders. See, e.g., FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF THE FIRM 12 (1991); Lucian A. Bebchuck, The Debate on Contractual Freedom in Corporate Law, 89 COLUM. L. REV. 1395, 1397, 1408-09 (1989); Daniel R. Fischel, The Corporate Governance Movement, 35 VAND. L. REV. 1259, 1262 (1982) (noting that the firm is a “legal fiction” serving as a nexus for the contracting process); Michael Jenson & William Meckling, Theory of The Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305, 312 (1976). The



essentially remained unchanged by focusing on whether corporations should only serve shareholders or other groups.34

1. The Case for Shareholder Primacy’s Dominance

For the past several decades, the victors of that debate have been the shareholder primacy model advocates.35 Despite criticism of this theory, “the vast majority of commentators accept the premise that the primary objective of the corporation is to maximize shareholder wealth.”36 Capturing this sentiment, Professor Clark notes that, while there are other laws affecting corporations, corporate law, by definition, deals only with the relationship between shareholders and directors and officers.37

In its strictest sense, the shareholder primacy model would prevent corporate focus on issues that do not directly advance short-term profit-making concerns. This understanding is personified in the classic 1919 Michigan Supreme Court case of Dodge v. Ford Motor Co.38 That court articulated the now-famous rhetorical slogan for the shareholder primacy norm: “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”39

Nearly 70 years later, the Delaware Supreme Court in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.40 reaffirmed the Dodge shareholder primacy model, stating that when a board decides to put a company up for sale, it has an absolute duty to maximize shareholder value.41 Articulated in this fashion, the shareholder primacy model

theory views the corporation as a web of contractual relationships, pursuant to which directors have a contractual obligation to pay heed to the interests of shareholders and favor those interests over other groups who have other avenues for protecting their rights. Id. See also Bainbridge, supra note 5, at 547 (advancing the director primacy theory, which contends that boards control corporations, and that shareholders are the appropriate beneficiaries of boards’ fiduciary duties). Recently Professors Lynn Stout and Margaret Blair have relied on a “team production” theory of the corporation to justify a focus on all corporate constituents. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 VA. L. REV. 247 (1999). This theory views the corporation as a team production and recognizes the efforts of all corporate constituents who contribute to corporate production. See id. at 249. In order to operate effectively, these constituents cede authority to the board, which seeks to balance their competing interests. See id. at 320. In this regard the board, as mediator of the various interests, has an obligation to all corporate stakeholders. See id. at 281. 34. See Stephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, 82 CORNELL L. REV. 857, 902-03 (1997) (noting that the corporate responsibility debate comes in cycles, with new terminology and new ideas, but is essentially the same); Wells, supra note 2, at 78 (noting that each new debate largely recapitulates the earlier debate in a slightly altered form). 35. Interestingly, in the 1950s and 1960s it appeared that the stakeholder theory held sway, with even Professor Berle agreeing that the debate had been settled “at least for the time being” in favor of Professor Dodd’s stakeholder theory. See ADOLF A. BERLE, JR., THE 20TH CENTURY CAPITALIST REVOLUTION 169 (1954). However, Dodd’s conception was ultimately eclipsed, see David Millon, Redefining Corporate Law, 24 IND. L. REV. 223, 230 (1991), and at least since the 1970s, clear support for the shareholder primacy norm surfaced and has remained. See Bainbridge, supra note 5, at 563; Wells, supra note 2, at 125. 36. Fisch, supra note 6, at 10-11. 37. See CLARK, supra note 3 at 30. 38. 170 N.W. 668 (Mich. 1919). 39. Id. at 684. 40. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). 41. Id. at 182.



seemingly disfavors corporate efforts to attend to community interests or otherwise engage in socially responsible behavior.42 This sentiment is perhaps best captured by Milton Friedman, who insisted that the “one and only social responsibility of business . . . [is] to increase its profits.”43

The shareholder primacy model also prevents corporate directors and officers from favoring other groups’ concerns over shareholders’ profits. Indeed, courts have insisted that directors owe no duties to other groups.44 This means that it is perfectly appropriate, if not required, for corporations to maximize the interests of shareholders at the expense of other groups’ concerns.45

Moreover, Revlon maintained that, at least when a corporation is for sale, a board violates its fiduciary duties by making decisions that value the welfare of other corporate constituents ahead of shareholders’ profit-making concerns.46 Similarly, Dodge found that management could not make decisions aimed at promoting the community in general at the expense of shareholders’ financial interests.47 These cases underscore the notion that corporations must focus on shareholders’ welfare, illustrating the seeming dominance of the shareholder primacy norm.

2. The Rebuttal

Scholars who contend that the shareholder primacy theory is not the norm, point to areas where courts have allowed corporations to focus on non-shareholder concerns, and even favor them over shareholder issues. One particular area to note is the legislative and judicial allowance of charitable contributions. Every state corporation statute allows corporations to donate money to charitable endeavors.48 Certainly the notion of giving away corporate funds appears inconsistent with maximizing shareholder profit.49 Corporations collectively give over $10 billion to charity in a single year “even though such giving has only the most tenuous connection to shareholder interests.”50 Scholars

42. In fact, the Dodge court viewed as problematic the management’s desire to do good for the community. See Dodge, 170 N.W. at 684. 43. Milton Friedman, A Friedman Doctrine—The Social Responsibility of Business is to Increase its Profits, N.Y. TIMES, Sept. 13, 1970, § 6 (Magazine), at 33. For a more in-depth discussion of Friedman’s argument see Chen and Hanson, supra note 5, at 42-52. 44. See, e.g., Simons v. Cogan, 549 A.2d 300, 304 (Del. 1988) (holding that directors owe no duty to debenture holders); Harff v. Kerkorian, 324 A.2d 215 (Del. Ch. 1974) (holding that directors owe no duty to holders of convertible subordinate debating). 45. See Katz v. Oak Indus. Inc., 508 A.2d 873, 879 (Del. Ch. 1986). 46. Revlon, 506 A.2d at 182. 47. See Dodge, 170 N.W. at 684 (suggesting that the notion that corporate directors owed duties to the general public reflected confusion). 48. See, e.g., DEL. CODE ANN. tit. 8, § 122(9) (2001) (granting corporations the power to make donations for the public welfare or for charitable purposes); REV. MODEL BUS. CORP. ACT § 3.02(13) (2004) (enabling corporations to make donations for the public welfare). See also Elhauge, supra note 24, at 738, 767-68. 49. See Jill E. Fisch, Questioning Philanthropy from a Corporate Governance Perspective, 41 N.Y.L. SCH. L. REV. 1091, 1094 (1997) (noting that from a law and economics perspective corporate charitable giving appears irrational). 50. Elhauge, supra note 24, at 738 (noting that corporate managers have always had the legal discretion to sacrifice corporate profits in the public interest); Adam Winkler, Corporate Law or the Law of Business?: Stakeholders and Corporate Governance at the End of History, 67 LAW & CONTEMP. PROBS. 109, 116-17 (2004) (same).



concur that little connects charitable giving to a corporation’s financial bottom line.51 Despite this seeming disconnect between charitable giving and shareholders’ profits, courts uniformly uphold the practice.52

Tellingly, courts sanction charitable donations over the objections of shareholders who complain that such donations diminish their profits.53 The law involving charitable contributions thus reflects a judicial willingness to allow corporate actors not only to forgo shareholder profit, but also to subordinate profit-making concerns in favor of community interest. Such willingness contradicts shareholder primacy as a normative principle.

Legal doctrines involving ordinary business decisions also undercut the shareholder primacy theory. Courts have allowed directors to forgo shareholder profit in consideration of a community’s interests. For example, in Shlensky v. Wrigley,54 the directors of the Chicago Cubs baseball team refused to install lights at the Wrigley Field stadium, and hence enable the team to play night games, because of their concern that night games would have deteriorating effects on the surrounding community.55 The directors admitted that, in making that decision, they were not interested in whether their actions would decrease shareholder profit.56 The shareholders sued the directors, arguing that their decision contravened the shareholder primacy norm articulated in Dodge.57

The court, however, upheld the directors’ decision, reasoning that corporate directors have the discretion to forgo shareholder profit to advance other interests. In so holding, the court implicitly recognized that corporate directors could serve parties other than shareholders, for example, the community at large, and could further those parties’ interests at the expense of shareholder profit. Professor Clark asserts that, while it should not be overstated, Wrigley “suggests that in practice courts will allow directors to temper business decision making with their perceptions of social values.”58

The American Law Institute (ALI) reflects this allowance by defining a corporation’s objectives to include an ability to devote reasonable resources to public welfare, humanitarian, educational, and philanthropic purposes, even when corporate profit and shareholder gain are not enhanced.59 The ALI recognizes that the modern corporation establishes interdependencies with a variety of groups from customers to

51. See Faith Stevelman Kahn, Pandora’s Box: Managerial Discretion and the Problem of Corporate Philanthropy, 44 UCLA L. REV. 579, 581 (1997); Nancy J. Knauer, The Paradox of Corporate Giving: Tax Expenditures, the Nature of the Corporation, and the Social Construction of Charity, 44 DEPAUL L. REV. 1, 56 (1994). 52. See, e.g., Theodora Holding Corp. v. Henderson, 257 A.2d 398, 405 (Del. Ch. 1969) (holding that a charitable gift for a worthy purpose not exceeding five percent of total income was proper); A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581, 586 (N.J. 1953) (refusing to declare a charitable contribution to a privately supported educational institution a misappropriation of corporate funds). 53. See Theodora Holding Corp., 257 A.2d at 398. 54. Shlensky v. Wrigley, 237 N.E.2d 776 (Ill. App. Ct. 1968). 55. Id. 56. Id. at 778. 57. Id. at 779. 58. See CLARK, supra note 3, at 139-40 (noting the flexibility to attend to other issues, but cautioning not to overstate the point because “Wrigley is a decision of one lower court in one state; and similar holdings elsewhere appear nonexistent”). 59. See The Objective and Conduct of the Corporation: Analysis and Recommendation, 1 A.L.I. CORP. § 2.01(b) (1994).



members of the community, and hence the corporation has a legitimate concern with meeting the expectations of such groups.60

An inevitable result of these interdependencies appears to be that the corporation’s profit-making goals “must be constrained by social imperatives and may be qualified by social needs.”61 Like the legal doctrine regarding charitable contributions, the recognition of these constraints and qualifications on business decisions both by the ALI and in case law suggests an important deviation from the shareholder primacy norm.

The extreme deference afforded directors’ business decisions strengthens their ability to take into account non-shareholder interests. Outside of conflict of interest settings, corporate directors have a duty of care to act in good faith and in a manner they believe to be in the best interests of the corporation.62 Courts analyze whether there has been a breach of that duty by reference to the business judgment rule.63 That rule not only represents a presumption that director decisions are rational and informed, but embodies a desire to refrain from second guessing the decisions of directors and officers.64

When applied, the business judgment rule results in court sanctions of the vast majority of corporate decisions. Indeed, the court in Shlensky upheld the directors’ decisions based in part on their understanding of the wide discretion afforded to directors to make decisions on behalf of the corporation, apparently even those that forgo shareholder profit.65 Reflecting this discretion, courts rarely overturn directors’ decisions in this area.66 In fact, outside of the takeover context, there are no reported cases in which courts have overturned directors’ decision to favor a constituent group over shareholders’ profit.67 By allowing directors the freedom to advance, and even favor, the interests of other groups, court application of the business judgment rule in the context of ordinary business decisions undermines the shareholder primacy norm.

Courts also have departed from an insistence on shareholder primacy in the takeover context. In Revlon, the Delaware Supreme Court asserted that when the corporation places a company up for sale, the board’s sole responsibility is to maximize shareholder value and hence it could not consider or favor other groups.68 However, the Delaware

60. See id. § 2.01 cmt. f. 61. See id. § 2.01 cmt. e. 62. See REV. MODEL BUS. CORP. ACT § 8.30 (2004). 63. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). 64. See Paramount Commc’ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 45 n.17 (Del. 1994) (noting the deference courts afford director decisions); Stephen Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 VAND. L. REV. 83, 90 (2004) (noting that the business judgment rule can be viewed as an abstention doctrine establishing a presumption against judicial intervention). 65. See Shlensky v. Wrigley, 237 N.E.2d 776, 780 (1968). See also CLARK, supra note 3, at 139 (noting that the main impression arising out of duty of care and business judgment rule cases is the limited restraints placed upon such decisions, and that Shlensky may reflect that “hands-off” concept); Bainbridge, supra note 64, at 96-97 (describing Shlensky as an example of judicial abstention pursuant to which the court refused to review directors' decisions). 66. See Fairfax, supra note 18, at 440. 67. See Elhauge, supra note 24, at 775 (noting that cases uniformly sustain profit-sacrificing conduct); William H. Simon, What Difference Does it Make When Corporate Managers Have Public Responsibilities?, 50 WASH. & LEE L. REV. 1697, 1698 (1993). 68. See Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (explaining the impropriety of a decision to favor creditors’ interests over those of the shareholders).



Supreme Court has subsequently limited Revlon in a manner that significantly chips away at the shareholder primacy norm.69 Indeed, before Revlon, the court in Unocal Corp. v. Mesa Petroleum Co.70 alluded to this limitation when it held that directors could consider the interests of “creditors, customers, employees, and perhaps even the community generally” when defending against a takeover.71 Moreover, the Revlon court confirmed director ability to consider stakeholder interests when attempting to prevent a takeover.72

In later cases, the Delaware court insisted that only two circumstances triggered the Revlon duty to maximize shareholder profit: when a board puts the company up for sale and during a change-of-control transaction.73 Outside of these circumstances, the court maintained that directors are “not under any per se duty to maximize shareholder value,” but instead are free to consider the interests of all groups impacted by the corporation, both in the context of takeovers and with regard to other business decisions.74

Outside of Delaware, 32 states have enacted “constituency” statutes that give directors the flexibility to consider other interests during takeovers and other business decisions.75 Legislatures passed such statutes during the height of takeovers in the 1980s to prevent the negative consequences such takeovers had on non-shareholder groups like employees and the surrounding community.76 By enabling directors to consider issues other than shareholder profits and to value groups other than shareholders during takeovers, those statutes undermine shareholder primacy.77 At least two thirds of the constituency statutes extend beyond takeovers, allowing directors to consider the concerns of non-shareholders when making ordinary business decisions.78 While only Connecticut requires directors to consider stakeholders,79 these statutes reflect further erosion of the shareholder primacy norm.

Moreover, the fact that courts have strayed from shareholder primacy in the takeover context reflects a significant erosion of that concept. This is because takeovers generate the highest level of tension between the stakeholder and shareholder theories given the promise of enormous wealth for shareholders at the expense of other groups’ interests as a result of a takeover. For example, takeovers tend to precipitate massive employee layoffs as well as plant closings that displace customers and undermine the affected community’s economic stability.80 Takeovers also increase creditors’ risks because they

69. See David Millon, Redefining Corporate Law, 24 IND. L. REV. 223, 240 (1991) (noting that limitations on Revlon suggest a judicial willingness to subordinate shareholder concerns); Lyman Johnson & David Millon, The Case Beyond Time, 45 BUS. LAW. 2105, 2110-12 (1990) (same). 70. Unical Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). 71. Id. at 955. While there appears to be some agreement on the notion that the Unocal standard has eroded, see Griffith, supra note 15, at 64, it remains true that the decision served to weaken the duty to maximize profit. See id. at 64-65. 72. See Revlon, 506 A.2d at 176. 73. See Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1150 (Del. 1989). 74. Id. 75. See Fairfax, supra note 18, at 460 n.285. 76. See Eric W. Orts, Beyond Shareholders: Interpreting Corporate Constituency Statutes, 61 GEO. WASH. L. REV. 14, 24 (1992). 77. See Fairfax, supra note 18, at 460-61 (discussing content of these statutes); Orts, supra note 76, at 26-27. 78. See Fairfax, supra note 18, at 463 n.299 (discussing statutes that apply only in the takeover context). 79. See id. at 460. 80. See Wells, supra note 2, at 126-28.



often involve the corporation assuming tremendous debt that it sometimes cannot repay.81 At the same time, takeovers offer shareholders significant premiums over their stock price.82 In this way, takeovers reflect a collision between the two theories, while the decision to forestall takeovers appears to represent a decision to disfavor shareholder maximization.83 The case law suggests that courts have settled this collision in favor of other groups, and hence suggests courts’ unwillingness to absolutely endorse shareholder primacy.

3. The Reaffirmation

Proponents of the shareholder primacy norm claim that these doctrines are consistent with the “long-term” interest of shareholders, and hence do not reflect a meaningful embrace of the stakeholder approach.84 Under this view, directors can forgo short-term shareholder profit to further long-term shareholder interest. To that end, this argument finds support in court decisions requiring all charitable contributions or expenditures for other social projects made by corporations to be reasonable in light of the corporation’s financial condition.85

Advocates of this long-term view also suggest that charitable contributions or other actions that advance non-shareholder interests enhance a corporation’s image, inuring to the benefit of shareholders by inspiring employee and customer loyalty.86 A similar result occurs when directors favor the interests of various groups. Thus, proponents of the shareholder primary view characterize all corporate decisions that advance other groups’ interests as truly aimed to benefit shareholders. Those scholars therefore explain away the seeming intrusions on shareholder primacy within the legal doctrine.

That characterization, however, while seemingly rooted in corporate practices, ignores several realities and ultimately belies the assumptions on which such characterizations rest. First, the flexibility courts afford directors and officers to address concerns of other groups under the guise of long-term shareholder value suggest that, as a

81. See Robert W. Hamilton, Corporate Mergers and Acquisitions, in THE GUIDE TO AMERICAN LAW YEARBOOK 66, 74 (1990) reprinted in CASES AND MATERIALS ON CORPORATIONS: INCLUDING PARTNERSHIPS AND LIMITED LIABILITY COMPANIES, at 983-85 (Robert W. Hamilton & Jonathan R. Macey, eds., 9th Ed.) (noting that after a takeover targets’ total debt obligations may exceed their ability to repay). 82. See Wells, supra note 2, at 126-28. 83. See Millon, supra note 69, at 240 (noting that judicial willingness to constrain director behavior for the benefit of other constituents in the context of takeovers reflects a significant intrusion on the shareholder primacy norm). 84. See THE BUS. ROUNDTABLE, PRINCIPLES OF CORPORATE GOVERNANCE 30 (2002), available at http://www.brtable.org/pdf/704.pdf (“Corporations are often said to have obligations to stockholders and to other constituencies, including employees, the communities in which they do business, and government, but these obligations are best viewed as part of the paramount duty to optimize long-term stockholder value.”); ORG. FOR ECON. CO-OPERATION & DEV., OECD PRINCIPLES OF CORPORATE GOVERNANCE 46 (2004), available at http://www.oecd.org/dataoecd/32/18/31557724.pdf (noting that it is “in the long-term interest of corporations to foster wealth-creating cooperation among stakeholders. The governance framework should recognize that the interests of the corporation are served by recognizing the interests of stakeholders and their contribution to the long-term success of the corporation.”). 85. See Ray Garrett, Corporate Donations, 22 BUS. LAW. 297 (1967) (noting that donations should be reasonable in light of a corporation’s financial condition and they should bear some reasonable relation to the corporation’s interest). 86. See Chen & Hanson, supra note 5, at 46-48.



practical matter, courts no longer require corporations to adopt shareholder primacy as their operating principle. Hence, many courts contend that corporate actions that forgo short-term profit, or otherwise favor non-shareholders, must bear some connection to shareholders’ long-term interests.

The standard for assessing that connection, however, appears to be relatively non-existent. Indeed, courts used to require managers to demonstrate that their efforts had some direct benefit to the corporation, but this requirement has been abandoned.87 Instead, courts appear to accept uncritically director declarations that their actions bear some relation to shareholder interests, even when such directors appear motivated by non-economic concerns.88 Thus courts, no doubt relying on the deference afforded directors under the business judgment rule, tend to accept blindly a director’s assertions that their actions benefit the long-term interests of shareholders.89

Second, courts appear willing to sanction actions under the “long-term” dichotomy, even when such actions are blatantly motivated by stakeholder concerns. A court has upheld charitable contributions as consistent with the long-term interests of shareholders despite the directors’ clear admission that they acted based on a belief that corporate income should be earmarked for worthy causes, “as a necessary and proper item of business expense.”90

In Shlensky, for example, corporate directors made clear that they were not interested in whether their actions financially benefited the corporation; rather, they explained their motives as based solely on their concern for the neighborhood.91 Nevertheless, the court presumed that the corporation had a long-term shareholder interest consistent with maintaining the neighborhood.92 Since the board never articulated such interests, the court’s presumption revealed the court’s willingness to hypothesize such an interest.93 Given court tendencies to sanction director conduct even when such conduct stems from a desire to prefer non-shareholder concerns over economic issues, the notion of long-term shareholder value appears to be a rhetorical device aimed at de-emphasizing the actual erosion of the shareholder primacy norm. 94

Third, some courts do not require corporations to justify expenditures based on long-term shareholder concerns at all. Those courts instead explicitly endorse the notion that

87. See AM. LAW INST., PRINCIPLES OF CORPORATE GOVERNANCE § 2.01 n.2 (1992); Edward S. Adams & Karl D. Knutsen, A Charitable Corporate Giving Justification for the Socially Responsible Investment of Pension Funds: A Populist Argument for the Public use of Private Wealth, 80 IOWA L. REV. 211, 233-34 (1995) (describing direct corporate benefit doctrine); id. at 227 (noting that courts have stretched the concept of direct benefit “to vindicate society’s desire to use private resources for public purposes”) Bainbridge, supra note 64, at 97 (arguing that courts did not require directors to demonstrate any benefit to the corporation). 88. See Elhauge, supra note 24, at 771-73 (noting that courts do not probe into actual profit-making potential of corporate decisions, but only require such potential to be conceivable). 89. See AM. LAW INST., supra note 87, § 2.01 n.2. 90. See Union Pac. R.R. Co. v. Trustees, Inc., 329 P.2d 398, 401-02 (Utah 1958). 91. See Shlensky v. Wrigley, 237 N.E.2d 776, 779 (Ill. App. Ct. 1968). 92. Id. at 781. 93. See Bainbridge, supra note 64, at 97 (noting that the court invented links to shareholder interests). 94. See Elhauge, supra note 24, at 745 (“Arguments that socially responsible conduct would increase profits are thus probably less about identifying profit-maximizing opportunities that corporations have missed than about helping create a patina of conceivable profitability that makes it easier for managers to engage in conduct that really sacrifices expected corporate profits.”).



corporations should dedicate a portion of their income to worthy endeavors.95 Even the ALI notes that corporations can devote resources to charitable endeavors even if there is no economic advantage to shareholders.96 Similarly, courts validate such giving based on the notion that charitable gifts generate good will in the community by enhancing the corporation’s reputation as a good citizen.97

Moreover, the claimed long-term explanation of these findings as one rooted in shareholder profits is unpersuasive in the context of takeovers where shareholders clearly have no long-term interest in the ongoing enterprise. For proponents of the shareholder primacy norm, Revlon may appear to be adequate confirmation of that norm. However, courts’ willingness to restrict Revlon should create cause for concern because it suggests that the shareholder primacy norm may have continued significance only in limited circumstances.

Indeed, it is noteworthy that the Delaware courts’ first endorsement of stakeholder rhetoric occurred in the takeover context, because it demonstrates the courts’ willingness to allow corporations to consider other constituents even when shareholders may not benefit. This destroys the perception that courts require an unwavering commitment to shareholder primacy.

Then too, outside of Delaware, numerous constituency statutes allowing directors to consider or favor the interests of relevant corporate stakeholders during takeovers and other activities undermine the shareholder primacy norm altogether.98 An analysis of those statutes reveals that they abrogate any requirement that corporations advance shareholder interests over others, instead enabling directors to balance the interests of all relevant groups without focusing primarily on shareholders. In this regard, the notion of long-term shareholder value cannot be utilized to justify the statutes.99

There are some who discount the impact of such statutes. For example, some might maintain that given Delaware’s primacy in corporate law, the fact that Delaware has not passed such a statute minimizes the overall impact of such statutes. However, it is arguable that in light of directors’ ability to attend to other constituents under Unocal, as well as the limits placed on Revlon, such statutes would be redundant in Delaware.

Some critics also might insist that the impact of these statutes may be limited because such statutes are not mandatory and were passed in part to protect managers rather than other constituents. To be sure, such statutes provide increased discretion to managers, enabling them to protect their jobs at the expense of shareholder profit.

95. See Theodora Holding Corp. v. Henderson, 257 A.2d 398, 405 (Del. Ch. 1969) (holding that a corporation should be allowed to promote public welfare); Sorensen v. Chicago, Burlington & Quincy R.R. Co., 199 N.W. 534 (Neb. 1924) (holding that corporations should be allowed to donate funds or services to aid in good works); A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581, 587 (1953) (holding that corporations have responsibility to support charitable causes). See also Adams & Knutsen, supra note 87, at 239 (noting that the court adopted corporate responsibility as an independent justification for allowing charitable corporate giving). 96. See AM. LAW INST., supra note 87, § 2.01 n.2, cmt. f. 97. See Victor Brudney & Allen Ferrell, Corporate Charitable Giving, 69 U. CHI. L. REV. 1191, 1193-94 (2002) (noting that most charitable contributions are characterized as “good-will” gifts that seek to promote the public image of the corporation). The good will promoted is approval of the corporation’s role as a good citizen. See id. at 1194. 98. See Fairfax, supra note 18, at 460-61; Mitchell, supra note 20, at 588-89; Orts, supra note 76, at 26-27. See supra note 77. 99. See Elhauge, supra note 24, at 766-67.



Regardless of the discretionary nature of such statutes and the legislators’ underlying motives, such statutes clearly adopt the rhetoric of stakeholder concerns.100 That adoption, at least rhetorically, reflects significant inroads into the shareholder primacy model. Moreover, in granting directors the freedom to consider various constituent interests even during takeovers, such statutes implicitly disclaim an exclusive duty to maximize profit, even in the long term.

C. Concluding Assessments

Viewed together, many doctrines, from those involving charitable contribution to those related to takeovers, reveal that corporate law has moved closer to the stakeholder model than the shareholder primacy norm. These doctrines grant directors and officers wide discretion not only to consider the interests of non-shareholders, but also to favor those interests in all but a narrow set of circumstances. Directors may be required to offer some plausible connection to shareholder concerns in making those decisions. But these trends illustrate that shareholder primacy may no longer constitute the chief concern governing corporate behavior. At the very least, courts allow corporations considerable flexibility in the concerns that guide their behavior.

The rhetoric, however, does not reflect this flexibility. Amazingly, most corporate scholars continue to proclaim the dominance of the shareholder primacy theory despite these erosions. They have done so even after courts and legislatures clearly articulated increasingly stakeholder focused doctrines.

Less than five years ago, Professors Henry Hansmann and Reinier Kraakman proclaimed, “there is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value.”101 This proclamation in the face of an apparent shift in corporate law illuminates the unwavering nature of the shareholder primacy rhetoric in corporate legal discourse.

In 2005 Professor Hansmann reaffirmed his earlier view, noting that there is “increasing consensus among the relevant actors around the globe” on the normative or ideological claim that the shareholder oriented model of the business corporation is “the most attractive social ideal for the organization.”102 Others similarly maintain that shareholder primacy is the clear winner in the debate regarding the normative goals of the corporation.103

III. THE EVIDENCE ON STAKEHOLDER RHETORIC

This Part illustrates the recent shift in corporate rhetoric towards a heightened embrace of stakeholder concepts. Based in part on an empirical study of corporate documents and websites, this Part demonstrates an increase in stakeholder rhetoric by corporations, business groups, business schools, and corporate scholars.

The corporate embrace of stakeholder rhetoric is certainly not a new phenomenon.

100. See id. at 767. 101. Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 GEO. L.J. 439, 439 (2001). 102. Henry Hansmann, How Close is the End of History?, 31 J. CORP. L. 745, 745-46 (2006). 103. See Chen & Hanson, supra note 5, at 40-41.



Such rhetoric finds its roots in Berle and Dodd’s discourse about the merits of corporate interests in issues other than shareholder maximization.104 In the 1920s, corporate officers and directors expressed the view that the corporation had obligations to groups beyond shareholders.105 Typified by business leaders like David Rockefeller, this rhetoric pervaded the literature of the 1950s, 1960s, and early 1970s.106 In response to this rhetoric, one writer complained that it was no longer fashionable for corporations to “take gleeful pride in making money.”107 With the enactment of the constituency statutes, a variation of stakeholder rhetoric had a resurgence in the late 1980s.108 Despite this shift in the discourse, stakeholder rhetoric has been eclipsed by shareholder wealth maximization discourse.109

Since 2000, corporate discourse reflects a shift from the traditional shareholder rubric to an embrace of rhetoric focused on stakeholders. In January 2005, The Economist captured this shift, noting: “The movement for corporate social responsibility has won the battle of ideas.”110 This Part explores the growing tendency of corporations to embrace stakeholder rhetoric and to distance the corporation from the shareholder primacy norm. As this Part reveals, corporations now are increasingly willing to adopt rhetoric that “posits that companies are beholden not just to stockholders—but also to suppliers, customers, employees, community members, even social activists.”111

This Part examines corporate rhetoric or “talk”112 by assessing literature disseminated from corporations, including annual reports, mission statements, “good citizenship” reports, websites, and corporate codes of conduct. In addition, this Article examines rhetoric within corporate governance principles adopted by various business organizations. Finally, this Article focuses on rhetoric within business schools in their curricula. This focus is critical given the importance of business schools in developing and shaping the philosophy of future business leaders.

A. Corporate Documents and Websites

In recent years stakeholder rhetoric has permeated official corporate documents. Thus, the annual reports of many large corporations justify the firm’s existence in terms of service to the community, not profit.113 According to The Economist, annual reports increasingly trumpet corporate programs focusing on non-shareholders like employee outreach, environmental protection, and community development. These reports talk only hesitantly about profit maximization.114 Hence, 88% of annual reports of Fortune 500

104. See id. 105. See id. at 37. 106. See Wells, supra note 2, at 101-13. 107. Id. at 101. 108. See id. at 128-30. 109. See Chen & Hanson, supra note 5, at 38-39; Allen, supra note 1, at 276. 110. The Good Company, supra note 8, at 3. 111. Brian Grow, The Debate Over Doing Good, BUS. WK., Aug. 15, 2005, at 76. 112. MARY ANN GLENDON, RIGHTS TALK: THE IMPOVERISHMENT POLITICAL DISCOURSE (1991). Glendon refers to American discourse as “talk,” and American talk regarding political matters as “rights talk.” See id. at 1-7. Glendon notes that the manner in which we discuss matters “shapes our feelings, judgments, choices and actions,” and hence that it is unwise to dismiss such talk as “mere rhetoric.” See id. at 11. 113. See The Good Company, supra note 8, at 3. 114. See id.



companies discuss activities with, and corporate commitment to, other stakeholders, ranging from employees to suppliers and creditors.115 Another 74% of these reports highlight the importance of such stakeholders in the first five pages of the report.116 Moreover, many annual reports discuss other interests throughout the document.117

In a radical shift away from profit speak, a few companies address their annual report to groups other than shareholders.118 For example, the annual report of General Electric Company begins with a “letter to stakeholders” as opposed to the traditional “letter to shareholders.”119 According to General Electric, their reference to stakeholders is meant to capture the company’s commitment to groups beyond shareholders.120 The rhetoric in these reports underscores corporate focus on stakeholders, as well as the prominence these concerns now receive.

In addition to their annual reports, many companies have adopted mission or value statements that de-emphasize shareholder profit and highlight the corporation’s commitment to its constituents and the broader, even global, community.121 The adoption of such goals reflects a global trend. A 2004 study representing 47% of North American companies, 27% of European companies, and 2.4% of Asian-Pacific companies, found that 89% of such companies have written value statements.122 Ninety percent of such statements emphasize ethical behavior and integrity.123 Other values highlighted in those reports included commitment to customers, commitment to employees and social responsibility, and corporate citizenship notions.124 Values associated with earnings

115. See infra Appendix A (revealing that 44 out of 50 companies include such rhetoric within their annual report). 116. Id. (indicating that 37 out of 50 companies discuss their commitment or responsibility to stakeholders within the first five pages of their annual report). 117. Indeed, Walmart’s annual report includes numerous references to stakeholders. See WAL-MART, 2005 ANNUAL REPORT (2005), available at http://www.walmartstores.com/Files/2005AnnualReport.pdf at 3, 10, 16, 17. Other reports similarly are replete with references to customers, community and the workplace. See TARGET, 2004 ANNUAL REPORT (2005), available at http://media.corporate-ir.net/media_files/irol/65/65828/reports/2004_TGT_annual.pdf; BANK OF AM., 2004 ANNUAL REPORT (2005), available at http://media.corporate-ir.net/media_files/irol/71/71595/reports/2004_ar.pdf; ALTRIA, 2004 ANNUAL REPORT (2005), available at http://www.altria.com/download/pdf/investors_AltriaGroupInc_2004_AnnualRpt.pdf; WALGREENS, 2005 ANNUAL REPORT (2005), available at http://investor.walgreens.com/downloads/ar2005.pdf. 118. See, e.g., THE HOME DEPOT, INC., 2004 ANNUAL REPORT (2005), available at http://ir.homedepot.com/downloads/HD_2004_AR.pdf; MEDCO HEALTH SOLUTIONS, INC., ANNUAL REPORT 2004 (2005), available at http://media.corporate_ir.net/media_files/NYS/MHS/reports/2004ar.pdf; MICROSOFT CORP., MICROSOFT CORPORATION ANNUAL REPORT 2005 (2006), available at http://www.microsoft.com/msft/ar.mspx. 119. See GEN. ELEC. CO., LETTER TO STAKEHOLDERS (2005), available at http://www.ge.com/files/usa/en/ar2004/pdfs/ge_ar2004_letter.pdf. This emphasis is consistent with the annual report which heavily emphasizes customers, the community, and the workplace. 120. See GEN. ELEC. CO., GUIDE TO THE GENERAL ELECTRIC 2004 ANNUAL REPORT: UNDERSTANDING ANNUAL REPORTS (2005), available at http://www.ge.com/files/usa/en/ar2004/pdfs/ge_ar2004_guide.pdf. 121. See The Good Company, supra note 8, at 3. 122. See CHRIS KELLY ET AL., THE ASPEN INST. AND BOOZ ALLEN HAMILTON INC., DERIVING VALUE FROM CORPORATE VALUES 2, 10 (2005), available at http://extfile.bah.com/livelink/livelink/145534/?func=dOc.Fetch&nodeid=145534 (discussing methodology). 123. Id. at 2. 124. Id. According to the study, 88% of such statements feature commitment to customers, while 78% include commitment to employees and 65% focus on commitment to social responsibility or corporate



received less prominence in these statements.125

My survey of Fortune 50 companies revealed that more than half of those companies generate separate and voluntary reports aimed at documenting their efforts to support stakeholders.126 Such reports, often entitled “corporate citizenship” or “corporate responsibility” reports, emphasize the corporation’s desire to be a “good corporate citizen” by focusing on the interests of customers, employees, and the broader community.127 Such reports are self-generated, thus reflecting a conscious decision by business leaders to embrace their sense of their corporation’s obligation to the community.

They also represent a recent phenomenon. Indeed, most companies prepared such reports only within the last two years. Only one such report was prepared before 2000.128 The U.S. trend of developing such reports mirrors, and in most respects lags behind, the move made in other countries.129 Between 1999 and 2002, the percentage of companies around the globe voluntarily preparing citizenship reports has increased to 45%.130 Moreover, several countries require corporations to generate reports or other disclosures about environmental and social behavior.131Additionally, the websites of the vast majority of Fortune 50 companies contain sections highlighting the company’s community involvement, charitable activities, and corporate social responsibility.132

citizenship. Id. Issues of environmental responsibility and diversity surface in fewer than half of such statements. See id. Interestingly, while North American companies are more likely to focus on ethical considerations in their value statements, Asian-Pacific and European companies are more likely to focus on social responsibility or corporate citizenship. KELLY ET AL., supra note 122, at 3. Hence, only 58% of North American companies include such issues, while 75% of Asian-Pacific companies and 69% of European companies have value statements that include such issues. Id. at 4. 125. Id. at 3-5 (noting that values such as initiative, adaptability and innovativeness appear in only 30% to 60% of formal value statements, while 69% of those statements focus on commitment to shareholders). 126. 58%, or 29 out of 50, Fortune 50 companies have prepared such reports. See infra Appendix A (study of Fortune 50 companies). 127. See CHEVRON CORP., 2004 CORPORATE RESPONSIBILITY REPORT, available at http://www.chevron.com/cr_report/2004/documents/cr_report_2004_complete.pdf; EXXON MOBIL CORP., 2004 CORPORATE CITIZENSHIP REPORT (2004), available at http://exxonmobil.com/corporate/files/corporate/ccr04_fullreport.pdf; FORD MOTOR CO., 2003/04 CORPORATE CITIZENSHIP REPORT (2004), available at http://www.ford.com/en/company/about/corporateCitizenship/report/default.html; GEN. ELEC. CO., OUR ACTIONS: GE 2005 CITIZENSHIP REPORT (2005), available at http://www.ge.com/files/usa/en/citizenship/pdfs/citizrep2005.pdf; GEN. MOTORS CORP., 2004 CORPORATE RESPONSIBILITY REPORT (2004), available at http://www.gm.com/company/gmability/sustainability/reports/04/000_tools/fullreport.pdf. 128. See infra. Appendix A. 129. See John M. Conley & Cynthia A. Williams, Engage, Embed, and Embellish: Theory Versus Practice in the Corporate Social Responsibility Movement, 31 J. CORP. L. 1, 2-4 (2005). 130. Id. at 6 (noting that between 1999 and 2002, the percentage of Fortune Global 250 companies producing social, environmental, or sustainability reports has increased from 35% to 45%). The authors also note that 72% of the top 100 Japanese companies produce such reports, while 49% of U.K. companies and 36% of U.S. companies engage in such reporting. See id. at 6. 131. See id. at 3-4 (describing countries, including France, Germany and Denmark, that require detailed disclosure of social and environmental risk). The authors also identify a new rule promulgated by the British government requiring reporting on social and environmental risks. See id. 132. Eighty-six percent, or 43 out of 50, of Fortune 50 corporations address stakeholder issues on their website. See infra Appendix A.



B. Codes of Conduct

In recent years corporations also have adopted codes of conduct that focus on the responsibilities directors and officers have to a variety of corporate constituents. The Sarbanes-Oxley Act of 2002133 essentially requires that public corporations adopt codes of ethics for their senior financial officers. The Act mandates that such corporations disclose if they have such a code and, if not, to provide a reason for its absence.134 In complying with Sarbanes-Oxley, many corporations have voluntarily adopted codes that sweep more broadly than establishing just a code of ethics for their financial officers. These broader codes often address the treatment of stakeholders and the corporation’s commitment to good corporate citizenship.135 Indeed, since society often equates ethical corporate behavior with conduct that accounts for all corporate constituents,136 the post-Enron push for corporate codes of ethics has spurred the implementation of general corporate codes that focus on the corporation’s responsibility to groups beyond shareholders.137

C. Corporate Infrastructure

With these developments, the stakeholder concept appears to have taken root within the corporate infrastructure. Many corporations have created positions for officers who are responsible for focusing on stakeholder issues or have sought the services of firms to help them meet the needs of such groups.138 Other companies have entire departments dedicated to such tasks. For example, Wal-Mart has a Global Ethics Office designed to promote and facilitate an effective global ethics program.139

Finally, many corporations have established committees on their boards that are charged with reviewing and overseeing the company’s programs on issues that impact the company’s stakeholders and broader society. In fact, more than 30% of Fortune 50 companies have such committees.140 The creation of these formal positions not only reflects the growing acceptance of stakeholder rhetoric, but also the desire to provide structural support for the implementation of the principles underlying that rhetoric.

133. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 406, 116 Stat. 745, 789-90 (codified in scattered sections of U.S.C.). 134. Id. § 406. Corporations also must disclose waivers to such codes. Id. 135. Joshua A. Newburg, Corporate Codes of Ethics, Mandatory Disclosure, and the Market for Ethical Conduct, 29 VT. L. REV. 253, 261-62 (2005). See, e.g., WAL-MART STORES, INC., STATEMENT OF ETHICS (2005) available at http://media.corporate-ir.net/media-files/IROL/11/112761/corpgov/Ethics%20_current.pdf (outlining responsibilities to shareholders, employees, suppliers, competitors, customers, communities, and governmental authorities). 136. See Newburg, supra note 135, at 292 (noting that stakeholder rhetoric “often overlaps substantially with the rhetoric of corporate codes of ethics”). 137. See id.; see also The Good, the Bad, and their Corporate Codes of Ethics: Enron, Sarbanes-Oxley, and the Problems with Legislating Good Behavior, 116 HARV. L. REV. 2123, 2126 (2003) (“[C]orporate scandals of the 1960s, 1970s, and 1980s ‘reinforced the conclusion that corporate codes should be part of the repertoire of corporate self-governance.’”) (citation omitted). 138. See The Good Company, supra note 8, at 3 (discussing creation of corporate responsibility officers within various corporations). 139. See WALMART STORES, INC., GLOBAL ETHICS OFFICE, available at http://www.walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=8. 140. See infra Appendix A (showing that 17 out of 50 companies have such committees).



D. Business Schools and MBA Students

Finally, business schools have embraced stakeholder rhetoric as evidenced by their curricula and related activities. Between 2001 and 2004, MBA programs placed significant emphasis on social and environmental responsibility in corporate affairs.141 A survey of MBA programs revealed that, in 2003, 45% of business schools required students to take one or more courses in ethics, corporate social responsibility or other related topics, whereas in 2001 only 34% of business schools had this requirement.142 For example, seven of the nine required courses at Notre Dame address the social significance of business practices.143

Integrating these courses into the business school curricula ensures that all business students examine issues focusing on stakeholders before their graduation. Surveys find a nearly 70% increase in the number of elective courses with social and environmental content.144 Research reveals that if electives are well received, their content inevitably will migrate into the core curricula.145 Thus, the dramatic rise in elective courses focusing on social issues strongly suggests that such issues will find a permanent place in business school courses.146

Other areas of the business school mirror this trend. Virtually all of the top-performing business schools have at least one academic center or institute in the school that focuses on social issues.147 Also, in 2003, business schools sponsored more than 700 conferences or events focusing on topics related to social and environmental issues—a near doubling of such events since the 2001 survey.148 These statistics indicate that at least some core business schools have adopted stakeholder rhetoric and indeed appear committed to training business leaders who endorse and practice stakeholder ideals.

The emphasis on social responsibility at the business school level and in the business community appears to be having an impact on MBA students, particularly at top-ranked schools. Indeed, there appears to be a growing number of MBA students who embrace a socially responsible philosophy. For example, 29 of the top 30 business schools in the Beyond Grey Pinstripes Study have an on-campus chapter of Net Impact, an organization promoting the use of business skills to make a positive influence on society.149 In fact, the total number of such chapters on all business school campuses has doubled since 2001,150 and recent survey found that most MBA students cared about the

141. The Princeton Review, Money Talks, Ethics Listens: Socially Aware MBAs (last visited Mar. 28, 2006), available at http://www.princetonreview.com/mba/research/articles/find/ethics.asp. 142. See THE ASPEN INST. & WORLD RES. INST., BEYOND GREY PINSTRIPES 2005: PREPARING MBAS FOR SOCIAL AND ENVIRONMENTAL STEWARDSHIP 2 (2005) [hereinafter BEYOND GREY PINSTRIPES], available at http://www.beyondgreypinstripes.org/pdf/2005_beyond_grey_pinstripes.pdf (describing data from survey conducted in 2003). 143. Jeremy Caplan, The Best in Class, TIME MAG., Dec. 19, 2005, at A37, 2005 WLNR 19911592. 144. See id. (finding over 950 electives). 145. See id. For example, Stanford offers 30 electives on topics from environmental sustainability to ethics. Id. at A37. 146. See BEYOND GREY PINSTRIPES, supra note 142. 147. See id. 148. See id. 149. See Francesca Di Meglio, B-School Students with a Cause, BUS. WK., Jan. 6, 2005, available at http://www.businessweek.com/bschools/content/jan2005/bs2005016_5334_bs001.htm. 150. Id.



social responsibility reputation of their employers.151

E. Corporate Organizations and Scholars

Traditional corporate organizations have also incorporated stakeholder rhetoric into their principles of corporate governance. Reflecting this incorporation, the ALI notes that “the corporation is a social as well as an economic institution, and accordingly . . . its pursuit of the economic objective must be constrained by social imperatives and may be qualified by social needs.”152 Entities such as the Business Roundtable and the Organization for Economic Co-operation and Development (OECD), a group comprised of 30 countries, including the United States, that focus on fostering good corporate governance, also recognize that corporations have some responsibility to stakeholders.153

Several authors on the forefront of corporate governance have recently recognized that directors have a responsibility not merely to shareholders, but also to stakeholders. Ira Millstein recently proclaimed that directors must be people whom “shareholders, employees, suppliers, customers and communities can trust to ‘do the right thing.’”154 In this same vein, Adrian Cadbury, the head of one of the first groups to publish corporate governance guidelines, argued that the international debate regarding corporate governance is converging on a stakeholder view of the corporation.155 In his view, directors “are being asked to account for the impact which actions taken in the interest of shareholders may have on society in its widest sense.”156

Even Professors Hansmann and Kraakman, who argued a few years ago that there was virtual universal agreement on the dominance of shareholder primacy, recently appeared to switch gears, stating “by assigning designated individuals a specific role as decision-makers on behalf of the enterprise, the corporate form enhances the probability that those individuals will respond in a principled fashion to the interests of all corporate constituencies simply through moral principles and social pressure.”157

F. Reflections on Stakeholder Rhetoric

It is important not to overstate the prevalence of stakeholder rhetoric. Some organizations have no such rhetoric in their principles of corporate governance. For

151. David B. Montgomery & Catherine A. Ramus, Corporate Social Responsibility Reputation Effects on MBA Job Choice 8 (Stanford Graduate Sch. of Bus., Research Paper No. 1805, 2003), available at http://gobi.stanford.edu/Research Papers/Library/RP805.pdf. 152. See AM. LAW INST., 1 PRINCIPLES OF CORP. GOVERNANCE § 2.01 cmt. e (1992). 153. See THE BUS. ROUNDTABLE, supra note 84, at 30-33 (noting obligations to employees and the community); see also id. at 33 (noting that the corporation has an obligation to “be a good citizen”); ORG. FOR ECON. CO-OPERATION & DEV., supra note 84, at 46 (“Corporations should recognize that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies.”). 154. Ira M. Millstein, The Accountable Corporation: A Perspective on Corporate Governance (Rules, Principles, or Both), in THE ACCOUNTABLE CORPORATION, VOLUME 1 (Marc J. Epstein & Kirk O. Hanson, eds., 2005). 155. See Adrian Cadbury, The Rise of Corporate Governance in THE ACCOUNTABLE CORPORATION, VOLUME 1 (Marc J. Epstein & Kirk O. Hanson, eds., 2005). 156. Id. 157. Henry Hansmann & Reinier Kraakman, What is Corporate Law?, in THE ANATOMY OF CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL APPROACH 12 (Reinier R. Kraakman ed., 2004).



example, the UK’s Principles on Corporate Governance make no reference to a corporation’s responsibility to stakeholders.158 A handful of companies ignore other constituent groups on their corporate websites.159 Additionally, the majority of business schools, 55%, do not require their students to take courses emphasizing social and environmental issues.160 Also, integration of such issues into other courses remains limited, which may marginalize such concerns.161

Then, too, there is a range of such language. Thus, some companies focus heavily on stakeholders by opening their annual report with such discourse and dedicating several pages to such groups and their interests.162 Other companies have a more limited focus, discussing such groups in a limited fashion at the end of the report.163

Moreover, even when major business groups adopt stakeholder rhetoric, some appear to marginalize or subordinate issues associated with non-shareholders. For example, the Business Roundtable only refers to stakeholder issues at the end of its Principles of Corporate Governance,164 and the OECD only refers to stakeholders in terms of the corporation’s responsibility to provide open communications with them,165 or to recognize their legal rights.166 Certainly, the stakeholder theory does not seek to completely eliminate a focus on shareholder interests.167 Yet this limited recognition of non-shareholder roles in the corporate enterprise appears inconsistent with the principles embodied in the stakeholder rhetoric. In this regard, pockets of corporate America (and in some cases significant pockets) exist that have not embraced stakeholder rhetoric.168

Regardless, stakeholder rhetoric has gained a significant foothold in the corporate setting. Indeed, the increased acceptance of stakeholder concepts in business schools and in at least some aspects of corporate governance principles indicates that significant portions of business leaders within the corporation and at the business schools responsible for training those leaders participate, and indeed embrace, stakeholder rhetoric.

Also, the prevalence of stakeholder concepts within various corporate documents and codes of conduct reflect an embrace of these issues, at least rhetorically. Although it may be inaccurate to characterize the corporate embrace of stakeholder rhetoric as a

158. THE COMBINED CODE ON CORPORATE GOVERNANCE (July 2003), available at http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf. 159. See supra note 130. Sixteen percent of companies incorporate no such issues on their website. 160. See BEYOND GREY PINSTRIPES, supra note 142. 161. Because of the difficulties in monitoring the extent to which ethics receive sufficient attention in other courses, experts debate whether it is preferable to have such integration as opposed to freestanding classes. However, the lack of integration often encourages students to view ethics or social issues discussed in other courses as marginal and less important or less significant to the “core” business subjects. 162. See supra note 116. 163. See EXXONMOBIL, 2004 ANNUAL REPORT (2005), available at http://www.exxonmobil.com/corporate/files/corporate/AR_2004.pdf; TIME WARNER, INC., 2004 ANNUAL REVIEW (2005), available at http://ir.timewarner.com/downloads/2004AR.pdf. 164. See THE BUS. ROUNDTABLE, supra note 84, at 30-33. The section on relationships with other constituents appears on the last three pages of the 33-page document. 165. OECD, supra note 84, at 21. 166. Id. at 46. 167. See supra Part II.A (addressing the scope of stakeholder theory). 168. In addition, such rhetoric may lag behind other countries. See Conley & Williams, supra note 129, at 3-6.



“total victory,”169 the increase of such rhetoric supports the notion that corporations, at least in their discourse, have shifted their guiding principles away from an exclusive focus on wealth maximization.

IV. THE IMPACT OF STAKEHOLDER RHETORIC ON CORPORATE NORMS

Both proponents and critics of the stakeholder theory tend to discount the importance of the growing rhetorical embrace of stakeholder concepts to corporate law. Such groups identify two reasons why such rhetoric may be relatively insignificant. First, they contend that the rhetoric appears inconsistent with the actual practices corporations implement and, hence, has had little impact on corporate behavior.170 Second, these groups assert that the increased endorsement of such rhetoric represents a temporary public relations response to the negative press generated by corporate scandals.171 Under this interpretation, stakeholder rhetoric, along with the practices it has generated, will recede once that press dies down. This Article declines to address the extent to which the rhetoric can, and likely will, have an impact on corporate conduct.172 Instead, this Article maintains that even if one concedes that the rhetoric may have no impact on corporate

169. In this regard, this Article departs from The Economist, which claimed that “[i]n public relations terms, [the stakeholder] victory is total.” The Good Company, supra note 8, at 3. 170. There is certainly evidence to suggest that the actual practice of corporations may belie their concerns for stakeholders. For example, in 2004 when stakeholder rhetoric appeared to permeate corporate documents and websites, the amount of money corporations donated to charitable causes amounted to less than 1% of pretax profit. See id. at 4. This relatively small amount is consistent with historical averages. Studies reveal that corporate giving rarely exceeds 1.5% of pretax corporate income. See Brudney & Ferrell, supra note 97, at 1194 n.20. It should be understood that 1% of corporate income represents a significant sum of money, particularly to charities with limited sources of funding. Then too, the stakeholder theory does not anticipate that corporations devote all or substantially all of their resources to charity. Ultimately, however, the level of charitable giving does not seem to reflect the apparent commitment corporations appear to espouse. Yet evidence also exists that corporations are increasingly involved in corporate programs aimed at what companies deem to be socially responsible endeavors. For example, in 2005, Home Depot announced plans to spend $25 million to build 1,000 playgrounds over the next three years. See Grow, supra note 111. In June 2005, General Electric revealed its plan to invest billions of dollars in environmental friendly technologies, while IBM has developed a program to bring its technologies to schools and communities. Id. Moreover, in May 2005, the chief executive at Home Depot invited executives from 24 companies and foundations to discuss community service. Id. As a result of that meeting, such executives plan to institute a nationwide corporate volunteer program to increase by 10% the number of corporate employees who provide some service to their community. Id. Hence, one can find support, at least anecdotally, both for and against the proposition that rhetoric influences corporate behavior. 171. The virtual wave of corporate misconduct typified by Enron and WorldCom generated significant negative publicity for corporations in general. See Lisa M. Fairfax, Form Over Substance?: Officer Certification and the Promise of Enhanced Personal Accountability under the Sarbanes-Oxley Act, 55 RUTGERS L. REV. 1, 10 (2002). Indeed, consumer confidence in corporations and their governance apparatuses plummeted, generating what some referred to as a crisis of confidence in the nation’s corporate governance system. Id. at 10 n.42. The corporate embrace of stakeholder rhetoric with its emphasis on good corporate citizenship reflects one key response to this crisis. As one source asserts, “[t]here’s no doubt that a surge in community outreach and do-good deeds is, in large part, a gussied-up bid for good favor.” See Grow, supra note 111. Hence, it is not fortuitous that the surge in stakeholder rhetoric has come on the heels of large corporate scandals. It also may be no surprise that 2003 and 2004, the immediate years after such scandals, witnessed all time highs in corporate charitable giving. Id. In this regard, commentators acknowledge the short-term impact of stakeholder rhetoric on corporate conduct. 172. Although an examination of the behavioral impact of corporate rhetoric is beyond the scope of this Article, I plan to explore such an impact in later scholarship.



conduct or that such impact is episodic at best, both critics and proponents of the stakeholder theory overlook the normative importance of such rhetoric.

This Part asserts that the rhetorical embrace of stakeholder concepts signals societal and investor dissatisfaction with shareholder primacy as the guiding norm of corporate behavior.173 This trend can be understood from two perspectives. First, when viewed in light of its classical meaning, corporate rhetoric can be characterized as a mechanism designed to persuade relevant audiences regarding the validity of the corporate enterprise and its agents’ behaviors. From this viewpoint, the fact that corporations adopt rhetoric embracing stakeholder concepts suggests that corporations do not believe that shareholder primacy rhetoric is as persuasive a justification for their behavior as stakeholder rhetoric.

Second, corporate rhetoric also can be viewed to serve an expressive function, reflecting corporations’ understandings that the most appropriate corporate behavior is an embrace of stakeholder concerns. Under either view, the fact that corporations favor a mode of discourse that embraces a concern for stakeholders suggests dissatisfaction with the shareholder primacy norm. Even if that dissatisfaction emerges only during times of distress, it sends an important signal about the public’s normative preference regarding the corporation’s behavior.

Section A of this Part develops a theory of corporate rhetoric that highlights its intrinsic value to the discourse on corporate norms. Part B illuminates the manner in which corporate rhetoric reveals a preference for the stakeholder theory. Part C explores the audiences at which corporations direct their rhetoric, concluding that such direction illustrates a broad acceptance of the rhetoric by non-shareholders and shareholders alike. Part D examines the relevance of the possible temporary nature of the rhetoric to these observations.

A. Towards a Definition of Corporate Rhetoric

What is rhetoric? Although it has its origins in classical Greek and Roman literature,174 today many people use the term in a derogatory fashion to refer to exaggerated language that lacks intrinsic value.175 Hence the term “mere rhetoric” refers to a mode of speech that is “intellectually vacuous.”176 Based on this view, one can easily dismiss rhetoric as insignificant.

Moreover, the notion that rhetoric lacks intrinsic significance finds support in the notion that while corporations adopt such rhetoric, they continue to engage in conduct inconsistent with that rhetoric.177 In this regard, it appears valid to dismiss such corporate

173. Arguably, the fluidity of corporate law identified in Part II, which enables corporations to focus and even favor non-shareholder interest over shareholders’ profit-making concerns, calls the norm into question. See Fairfax, supra note 18, at 458-59; Blair & Stout, supra note 7, at 406. 174. See Michael Frost, Introduction to Classical Legal Rhetoric: A Lost Heritage, 8 S. CAL. INTERDISC. L.J. 613, 614 (1999) (noting historical roots of rhetoric); Bernard E. Jacob, Ancient Rhetoric, Modern Legal Thought, and Politics: A Review Essay on the Translation of Viehweg’s “Topics and Law”, 89 NW. U.L. REV. 1622, 1636 n.46 (1995) (same). 175. See Frost, supra note 174, at 614 (noting that the term “rhetoric” today is “usually associated with meaningless political exaggeration or more stylistic embellishment”). 176. See AMERICAN HERITAGE COLLEGE DICTIONARY 1170 (3rd ed. 2000). 177. See supra note 170.



rhetoric as insincere lip service. This dismissal, however, overlooks both the persuasive and expressive functions of

rhetoric. Under the classic understanding of rhetoric, embraced by philosophers such as Aristotle, Cicero, and Plato, rhetoric constituted a form of persuasive discourse.178 From this perspective, rhetoric was a true art that embodied the ability not only to articulate views, but also to use language as a persuasive device to influence a particular audience about the validity of a given position.179 Aristotle insisted that rhetoric adopted by a given person represented the rhetor’s180 assessment of the language most likely to persuade a particular audience.181

In fact, Aristotle viewed rhetoric as a means of ascertaining the “truth” of an issue, where truth is not fixed, but rather reflects the best available argument.182 In Aristotelian terms, rhetoric is a form of argumentative discourse where the most persuasive arguments prevail and reflect “truth” concerning a given issue.183 Rhetoric thus has inherent value because it reflects a certain truth or the most persuasive justification for a given position.

Based on this view, corporate rhetoric, as embodied in various corporate documents, websites, and business school curricula, has an intrinsic value because it reflects corporations’ assessments about the type of language their audiences will find acceptable, and hence most persuasive, as a justification for their behavior. The fact that the rhetoric is most closely associated with marketing and public relations underscores this point because in either setting corporate actors specifically adopt language they believe will enable them to better relate to the public or that will encourage the public to think favorably regarding their behavior.

Rhetoric also may be viewed as a corporation’s expression of its highest ideals for its conduct. Recent scholars have argued that legal rhetoric embodied in court decisions identifies and clarifies acceptable norms of corporate behavior.184 While one may debate

178. See, e.g., PLATO, GORGIAS 453a, 453d (380 B.C.) in PLATO: EUTHYPHRO, APOLOGY, CRITO, MENO, GORGIAS, MENEXENUS at 237-38 (R.E. Allen trans., 1984) (defining rhetoric as the craft of persuasion); ARISTOTLE ON RHETORIC: A THEORY OF CIVIC DISCOURSE 36 (George A. Kennedy trans., Oxford Univ. Press 1991) (350 B.C.) (defining rhetoric as the “ability in each [particular] case to see the available means of persuasion”); Jacob, supra note 174, at 1636. See also AMERICAN HERITAGE COLLEGE DICTIONARY, supra note 176, at 1170 (defining rhetoric as a skill in using language effectively and persuasively). Along this same vein, speech is viewed as not only the primary means to communicate ideas and beliefs, but also as a means of influencing others. Hence, whether we define the language used by corporations as rhetoric or speech, the underlying notion is that the speech communicates ideas. See David Kretzmer, Freedom of Speech and Racism, 8 CARDOZO L. REV. 445, 462 (1987). Indeed, the First Amendment protects speech based on the notion that it represents the principal means of communicating ideas, and the primary vehicle of persuading people regarding the validity of those ideas. 179. See The Internet Classics Archive, Rhetoric by Aristotle, http://classics.mit.edu/Aristotle/rhetoric.1.i.html (last visited Mar. 29, 2006) (stating that rhetorical study in its strictest sense is concerned with modes of persuasion). 180. In the Roman period, “rhetor” refers to a teacher of rhetoric, while in classical Greek it refers to any public speaker. ARISTOTLE, supra note 178, at 35 n.32. 181. In Aristotle's view, rhetoric is “an ability, in each particular case, to see the available means of persuasion.” See id. at 36. 182. See id. at 34 n.24 (noting that Aristotle believed truth was grounded in nature and capable of apprehension by reason). 183. See id. at 33 (noting that Aristotle believes that people have a natural disposition for the truth, and reasoning will allow them to regard this truth). 184. See Robert Cooter, Expressive Law and Economics, 27 J. LEGAL STUD. 585, 604 (1998); Melvine A.



the impact of such rhetoric on behavior,185 these scholars agree that such rhetoric expresses the kind of behavior in which courts would prefer corporate actors to engage.186 In fact, Professor Sean J. Griffith has advanced a theory of corporate rhetoric in which he asserts that the rhetoric embodied in judicial opinions can be viewed as a “thaumatrope” that enables courts to exercise doctrinal flexibility.187 Under Griffith’s view, this flexibility allows judges to respond to public pressure by shifting their rhetorical discourse from accountability, on the one hand, to flexibility on the other.188 In this way, courts use judicial rhetoric to communicate their expectations about corporate behavior in light of the public’s perception of that behavior.

Corporate documents, even more pointedly than judicial opinions, have a profound expressive function that not only shapes, but also reflects, a corporation’s future actions. To be sure, rhetoric embodied in corporate documents and on corporate websites may be regarded in part as the corporate response to judicial rhetoric. Corporate rhetoric expresses corporate compliance with judicial standards, as well as corporations’ understandings of the kind of behavior necessary to achieve their compliance with judicial rulings.

Corporate rhetoric, seen as both a persuasive and an expressive device, has important repercussions for our understanding of corporate norms. Scholars agree that judicial rhetoric reflects courts’ expression of the most appropriate norm.189 In other words, court opinions allow judges to articulate the normative behavior they would like corporate actors to follow. The essential function of that rhetoric, however, is to define and protect judicial authority.190

Rhetoric espoused by corporations can be viewed in an even more broad-sweeping manner. Thus, corporate rhetoric, like judicial rhetoric, operates to protect and to validate the corporate enterprise by expressing those normative positions that relevant audiences find to be the most persuasive justification for that enterprise. It also can be understood as a normative expression of a corporation’s ideals. This view is explicitly captured in the annual report of Citigroup, Inc., which discusses its responsibility to employees and other stakeholders under the heading of “The Company We Want to be.”191 As this sentiment suggests, corporate rhetoric, at its core, is aspirational and hence normative, embodying corporations’ assessments of the behavior they ought to engage in. Whether they engage

Eisenberg, Corporate Law and Social Norms, 99 COLUM. L. REV. 1253, 1270 (1999) (arguing that the courts instruct directors on how to “play their directed role”); Griffith, supra note 15, at 8 (describing good faith as a rhetorical response to corporate crisis); Rock, supra note 15, at 1016 (noting that rhetoric in legal opinions helps clarify courts’ expectations regarding corporate behavior even when no liability is found). Professor Rock refers to judicial rhetoric as storytelling, noting that Delaware courts tell stories through opinions as a way of articulating the appropriate norms. Rock, supra note 15, at 1063. 185. See Peter C. Konstant, Sacred Cows or Cash Cows: The Abuse of Rhetoric in Justifying Some Current Norms of Transactional Lawyering, 36 WAKE FOREST L. REV. 49, 81-99 (2001) (noting the manner in which rhetoric can be used to avoid meaningful analysis). 186. See Griffith, supra note 15, at 56. 187. Id. 188. See id. 189. See id.; Rock, supra note 15, at 1063 (arguing that the Delaware courts “tell stories as a way of articulating and expressing norms”). 190. See Griffith, supra note 15, at 56. 191. See CITIGROUP INC., 2004 ANNUAL REPORT (2005), available at http://citigroup.com/citigroup/fin/data/ar041c_en.pdf.



in such behavior at present is beside the point. What the corporation aspires to signals its preferred conduct, illustrating its expression of the optimal norm.

B. The Meaning of the Message

Understanding rhetoric from this vantage point means that the content of such rhetoric illuminates both persuasive and expressive values. To the extent that such rhetoric embodies stakeholder concepts, it suggests corporations’ assessments that such concepts resonate with particular audiences. In other words, that rhetoric suggests a corporate understanding that as a normative matter, audiences desire corporations to engage in behavior consistent with the stakeholder theory. Moreover, by shifting the discourse away from an exclusive focus on shareholders and profit-making concerns and towards a consideration of other interests, the embrace of such rhetoric signals a rejection of at least the core concepts of shareholder primacy.

Of course, some may argue that the embrace of stakeholder rhetoric does not signal a rejection of shareholder primacy because such rhetoric and its corresponding behavior can operate in harmony with shareholder primacy. Indeed, proponents of the long-term view of shareholder primacy would contend that such a view accommodates non-shareholder issues.192 This accommodation occurs because “stakeholder” concerns, such as giving money to charity or behaving responsibly towards employees and customers, inure to the benefit of shareholders in the long-term.193 In support of this rationale, some corporate documents express the notion that focusing on stakeholder issues is important to ensuring long-term shareholder value.194 As such, corporations do not abandon their focus on shareholders in articulating stakeholder concepts. All annual reports include a discussion of shareholder and financial returns, while most corporate value statements include shareholders among the groups of people to whom the corporation owes some responsibility.195 In this regard, rather than rejecting shareholder primacy, the corporate rhetoric can be viewed as expressing a normative preference for long-term shareholder primacy.

However, to the extent that the stakeholder theory refers to ensuring that corporations balance the interests of all constituents, on a spectrum, corporate rhetoric appears more consistent with that theory than with shareholder primacy. First, it should be noted that, given the flexibility of the long-term shareholder view, which enables corporations to attend to other interests with little, if any, proof of its connection to profit-making, any rhetorical endorsement of the view seems to be a rejection of strict shareholder primacy. Second, the stakeholder theory does not require a rejection of

192. See Chen & Hanson, supra note 5, at 46-48 (noting the view that a focus on non-shareholders is consistent with a focus on shareholders). 193. See id. 194. See, e.g., HEWLETT-PACKARD DEV. CO., HP ANNUAL REPORT 2003 21 (2004), http://www.hp.com/hpinfo/investor/financials/annual/#2003 (noting that while the company engages in socially responsible behavior “because it’s simply the right thing to do,” the company also engages in it because it enhances the company’s bottom line). See VERIZON, 2004 ANNUAL REPORT 14 (2005), available at http://investor.verizon.com/financial/quarterly/pdf/04VZ_AR.pdf (“Being responsible members of our communities makes us better at what we do. As we succeed, we produce not only a good return for shareowners and a good living for our employees, but we also create something of lasting value for society.”). 195. See KELLY ET AL., supra note 122, at 3.



profit-making considerations. As one chief executive remarked, you cannot be a charitable giver or otherwise engage in socially responsible behavior without making money.196 Hence, any rhetoric must allow companies to discuss shareholders and profit-making concerns. However, the stakeholder theory insists that companies balance their commitments to other groups and issues.

Corporate rhetoric appears to express a preference for such a balance. Indeed, where shareholder primacy would suggest that when balancing various group interests shareholders should receive preference and prominence, the rhetoric does not reflect such a hierarchy of interests. Instead, the rhetoric suggests that shareholders are just one of many corporate constituents that corporations must serve.197

In addition, some documents refer to shareholders after discussing their commitments to other groups. Perhaps the oldest and most publicized example of such a document can be found in Johnson & Johnson’s Credo, which puts customers first and shareholders last.198 In its Credo, the company discusses its responsibilities to customers, employees, community, and finally, stockholders.199 Apparently underscoring this ranking of their commitment, Johnson & Johnson refers to stockholders as their “final responsibility.”200

This reordering of corporate commitment can be found in documents of other corporations.201 Indeed, several companies address stakeholder concerns on the very first page of their annual report.202 Moreover, a recent study reveals that while shareholders receive some prominence within corporate value statements, they are outranked by customers and employees.203 In this regard, the rhetoric suggests that corporations should not only balance the concerns of all groups, but also in some circumstances should place their interests before those of shareholders. This kind of rhetoric is more consistent with the stakeholder theory than with the shareholder primacy theory.

This rhetoric reflects a rejection of the strict understanding of shareholder primacy. Viewing corporate documents collectively, it is clear that few corporations speak solely in terms of shareholder profit, and no corporation focuses only on short-term profit. Instead, virtually every corporation expresses some concern for a broader array of

196. Debra L. Lee, Chief Executive Officer, Black Entertainment Television, Lawyers as Leaders: Chartering the Course of America, Remarks at the Harvard Law School Celebration of Black Alumni (Sept. 17, 2005). 197. See KELLY ET AL., supra note 122, at 2-3 (discussing value statements where shareholders were discussed along with other groups without receiving any particular prominence). 198. Johnson & Johnson, Our Credo, available at http://www.jnj.com/our_company/our_credo/index.htm (last visited Mar. 29, 2006). 199. Id. 200. Id. 201. For example, before discussing its commitment to performance, Pfizer Inc.’s expression of value focuses on integrity, respect for people, customers, community, innovation, and teamwork. See Pfizer Inc., About Pfizer: Vision and Values, http://www.pfizer.com/pfizer/are/mn_about_vision.jsp (last visited Mar. 29, 2006). A similar reordering can be seen in the manner in which General Electric, Home Depot, Microsoft, and Medco open their annual reports with a letter addressed to other constituents. See sources cited supra notes 116-17. 202. See infra Appendix A (revealing that seven companies address stakeholder concerns on the very first page of their annual reports). 203. See KELLY ET AL., supra note 122, at 3.



interests either within its annual report or on its corporate website.204

Additionally, when corporations discuss other constituents, they do not necessarily justify their actions in terms of profit. For example, in its annual report, ExxonMobil Corporation explains that it has a commitment to servicing the community because “we live here too.”205 Also, while some may suggest that the connection to shareholders is implicit, at least 42% of Fortune 50 companies make no reference to shareholder profit or value when discussing other groups in their annual report.206 This failure to discuss shareholders suggests that corporations do, in fact, distance themselves from a strict view of the shareholder primacy norm that focuses only on profit.

This distancing may stem from corporations’ beliefs that society, including investors, finds the principles underlying stakeholder rhetoric more acceptable than those embodied within the shareholder primacy norm. Indeed, corporate pressure to embrace stakeholder rhetoric reflects society’s desire for corporations to be good citizens as well as their belief that such citizenship is more closely aligned with the stakeholder theory. Commentators agree that corporations adopt stakeholder rhetoric to project an appearance of good corporate citizens.207 At the very least, it follows that society equates such citizenship with stakeholder principles.

Moreover, it also appears that society does not believe that the principles embodied in the shareholder primacy norm comport with good corporate citizenship. In fact, Professor Clark notes that the most serious criticism of the shareholder primacy model relates to the notion that strict profit maximization may prohibit corporations from pursuing public goals.208 Indeed, one author notes that corporations, at least in this current climate, have found it difficult to focus solely on profit-making considerations.209 Instead, corporations feel pressured to address the concerns of customers, employees, and the broader society.210 In this regard, the recent surge in stakeholder rhetoric surrounding good corporate citizenship, coupled with a decreased emphasis on shareholder primacy norm, underscores society’s discomfort with the ability of the shareholder primacy norm to accommodate society’s desire that corporations demonstrate their citizenship.

Society and investors have encouraged embracing the stakeholder rhetoric because such groups seem to equate ethical behavior with the stakeholder norm. During corporate misconduct, such as the recent scandals involving corporate fraud like WorldCom,211 corporations feel pressured to demonstrate a commitment to ethical values.212 Studies

204. See infra Appendix A (revealing that all but one company discuss other stakeholders in some arena, whether on their website, in their annual report or corporate citizenship report, or in the context of a committee). 205. EXXONMOBIL CORP., 2004 SUMMARY ANNUAL REPORT 37 (2005), available at http://www.exxonmobil.com/corporate/files/corporate/AR_2004.pdf. ExxonMobil similarly does not justify its commitment to employees in relation to shareholder profit. In its words, “[w]e are committed to providing a positive work environment that values the wide-ranging perspectives inherent in our diverse workforce.” Id. at 34-35. 206. See infra Appendix A. 207. See Knauer, supra note 51, at 57-60; The Good Company, supra note 8, at 3. 208. See CLARK, supra note 3, at 680. 209. See Grow , supra note 111. 210. See id. 211. See Fairfax, supra note 171, at 7-8. 212. See The Good, the Bad, and their Corporate Codes of Ethics: Enron, Sarbanes-Oxley, and the Problems with Legislating Good Behavior, 116 HARV. L. REV. 2123 (2003).



reveal that this demonstration often takes the form of the adoption of corporate codes, many of which embody stakeholder concepts.213 The commitment to ethical conduct also takes the form of more pronounced stakeholder rhetoric, coupled with a move to de-emphasize shareholder primacy.214 Indeed, Professor Clark suggests that the public views the corporate manager who embraces some form of stakeholder rhetoric as “nobler and more trustworthy” than one who adopts shareholder primacy rhetoric, and hence is viewed as the “calculating opportunist.”215 To this end, the embrace of stakeholder rhetoric suggests some societal discontent with the shareholder primacy norm’s ability to constrain improper and unethical conduct. At bottom, this reflects the persuasive nature of stakeholder rhetoric.

These expressions also reflect a greater concern for balancing the interests of all groups, and that such advancement acknowledges some discontent with the normative idea that the corporation’s sole or primary objective should be to maximize profit. At best, the corporate rhetoric endorses the long-term shareholder primacy view, which is admittedly flexible and allows corporations to attend to many non-shareholder interests even when there is relatively little impact on profit considerations. There is much to suggest that such rhetoric is more expansive than this view. This is because some portions of the rhetoric do not seek to justify programs only in terms of their value to shareholders, while other portions do not focus on shareholder or profit-making issues at all. In fact, there are instances in which it appears that corporations have sought to distance themselves from such rhetoric because that rhetoric fails to capture values that society finds important. Hence, on a spectrum, the current corporate rhetoric appears more closely aligned with stakeholder theory. Since the rhetoric reflects corporate assessment and expression of the most persuasive norm, that rhetoric appears to reveal a normative preference for the stakeholder theory.

C. The Relevance of Audience

The variety of different audiences at which corporate rhetoric appears to be aimed underscores the notion that its embrace reflects some broad-based dissatisfaction with shareholder primacy as a norm. An assessment of the audience further illuminates the fact that even shareholders and the business community respond favorably to stakeholder concepts. Rhetoric in the Aristotelian view focuses not only on the importance of the language used to convey a particular message, but also on the ability of that message to persuade a given audience.216 Aristotle recognized that the audience was important and that the rhetor must carefully choose his words to effectively persuade a given audience.217 In his words, “the persuasive is persuasive to someone.”218 This suggests

213. See Newburg, supra note 135, at 255, 258, 268; Harvey L. Pitt & Karl A. Groskaufmanis, Minimizing Corporate Civil and Criminal Liability: A Second Look at Corporate Codes of Conduct, 78 GEO. L. J. 1559, 1589-99 (1990). 214. See The Good, the Bad, and their Corporate Codes of Ethics: Enron, Sarbanes-Oxley, and the Problems with Legislating Good Behavior, supra note 212, at 2127 (discussing the cycles of corporate codes and stakeholder rhetoric); Pitt & Groskaufmanis, supra note 213, at 1575-98. 215. See CLARK, supra note 3, at 687. 216. See infra notes 218, 219. 217. See ARISTOTLE, supra note 178, at 41 (noting that rhetoric focuses on what appears true to a given audience or to the people in need of argument).



that the audience determines the purpose of the rhetoric.219

This Article advances three points with regard to audience. First, this Article recognizes that examining the audience demonstrates that corporations may adopt rhetoric for instrumental or profit-making purposes. The second point, however, maintains that even if rhetoric is aimed at different audiences and hence is adopted for different purposes, such purposes do not negate the normative significance of its adoption. That adoption confirms corporate understanding that such audiences, including federal regulators and the judiciary, find rhetoric that embraces stakeholder concepts as a more persuasive justification for corporate existence than shareholder primacy rhetoric. Third, this Article points to evidence that corporations aim stakeholder rhetoric at investors and at the business community. This final point indicates that corporations include shareholders within the audiences that they believe find stakeholder rhetoric persuasive.

1. Pinpointing the Audience and Purpose of Rhetoric

Because corporate rhetoric is accessible to the general public, it may be difficult to determine the audience at which such rhetoric is aimed. This Section analyzes the many viable possibilities.

a. Judiciary and Federal Regulators

Some contend that corporations adopt other rhetoric in response to increased federal regulation of corporations as well as increased judicial activism. It is certainly true that corporate rhetoric has increased in the past five years, which coincides with the period of increased government regulation in the form of both the passage of Sarbanes-Oxley220 as well as in the form of criminal prosecutions of high-profile corporate executives.221

Similarly, during this period courts have become more interventionist and less deferential to corporate decision-making. This can be seen not only in the Delaware Supreme Court’s willingness to overturn lower court decisions,222 but also in its articulation of seemingly more stringent standards of review for corporate conduct in the form of the good faith doctrine and a less deferential definition of director independence.223 At least one study suggests that corporations believe that demonstrating strong values through corporate value statements embracing ethics and consideration of

218. Id. at 41; The Internet Classic Archive, supra note 175, at Part 2 (noting that a statement is persuasive because there is someone whom it persuades). 219. See ARISTOTLE, supra note 178, at 47 (noting that rhetoric’s objective relates to the person addressed); The Internet Classic Archive, supra note 179, at Part 2 (noting that the hearer of the rhetoric determines the rhetoric’s end and objective). 220. President Bush described Sarbanes-Oxley as the most far-reaching reform since Franklin Roosevelt’s time. George W. Bush, President of the United States, Remarks at the Signing of the Sarbanes-Oxley Act of 2002 (July 30, 2002), available at http://www.whitehouse.gov/news/releases/2002/07/20020730.html. 221. See Fairfax, supra note 171 at 11 n.46, 59-60 (discussing several criminal cases against corporate executives). 222. See Renee M. Jones, Rethinking Corporate Federalism in the Era of Corporate Reform, 29 J. CORP. L. 625, 645 (2004); Hillary Sale, Delaware’s Good Faith, 89 CORNELL L. REV. 456, 469-82 (2004) (noting the willingness of Delaware courts to use the doctrine of good faith). 223. See id.



others is essential to mitigating legal and regulatory risk.224 Hence, it seems plausible that corporate rhetoric represents a response to increased activity by regulators and the judiciary, and is thus aimed at those audiences.

Viewed against this backdrop, corporate rhetoric may be designed to prevent increased government and judicial regulation of corporate conduct. Professor Griffith argues that the primary function of corporate judicial rhetoric is to protect the judiciary from entangling itself in disputes about corporate behavior.225 Similarly, to the extent rhetoric is aimed at federal regulators and judges, the function of corporate rhetoric is to protect corporate decision-making from the threat of judicial or governmental intervention. This threat encourages corporations not only to engage in proper conduct, but also to seek measures of assuring regulators of such engagement. Corporate rhetoric attempts to provide that assurance.

b. Customers

It is also possible that corporations aim their rhetoric at customers. For example, an evaluation of the rhetoric adopted by corporations reveals that corporations engaged in the service industry are more likely to include stakeholder rhetoric in their discourse than corporations outside the service industry.226 The fact that corporations feature stakeholder rhetoric on websites available to the public, and thus all potential customers, further supports the proposition that corporations utilize such rhetoric to attract those customers. There is also a growing recognition among corporations that stakeholder values enhance a corporation’s reputation and inspire brand loyalty among customers.227 Corporations that recognize this have an incentive to direct their stakeholder rhetoric at customers.

If corporations adopt rhetoric to appeal to customers, then the primary purpose of such rhetoric may be to increase profits. Indeed, ensuring a better reputation in the community and thereby enhancing brand loyalty ultimately means that corporations will attract more customers to purchase their products and services.228 In fact, many commentators insist that most, if not all, corporate engagements in socially responsible behavior represent an attempt to curry favor with potential customers and improve the corporation’s bottomline.229 Based on this view, if corporations aim their rhetoric at customers, then such rhetoric is consistent with their profit-making considerations.

224. See KELLY ET AL , supra note 122, at 5. 225. See Griffith, supra note 15, at 56. 226. See infra Appendix A. 227. See GREGOR HARTER ET AL., BOOZ, ALLEN, & HAMILTON, MANAGING BRANDS FOR VALUE CREATION 1 (2004) (noting that over 90% of corporations believe that their brand is key to their success), available at http://extfile.bah.com/livelink/livelink/145647/?func=doc.Fetch&nodeid=145647; Alex Bollen, What Value Your Reputation, PHARMATIMES, Apr. 2004, at 34-35 (discussing the impact of reputation on a company’s financial health), available at http://www.mori.com/pubinfo/ahb/what-value-your-reputation.pdf. Indeed, when Home Depot participated in the effort to assist victims of Hurricane Katrina, members of its management acknowledged that engaging in such charitable efforts was critical to its reputation. See Justin Gillis & Michael Barbaro, The Object of Their Desires: A Big Plastic Jug, WASH. POST, Sept. 7, 2005, at D1. 228. See id. 229. See Gillis & Barbaro, supra note 227 (noting that companies engage in charitable endeavors during times of crisis to attract customers).



c. Employees—Current and Future

Some believe that corporations target rhetoric at their employees. Certainly some corporate codes of conduct appear to speak directly to employees, expressing both a commitment to employees and an expectation regarding their proper conduct in the workplace.230 Moreover, at a recent conference, several CEOs of public companies indicated that embracing stakeholder rhetoric and values reflected a response to the needs of employees.231 The president and chief operating officer of The Goldman Sachs Group argued that in order to attract quality employees, the company had to be perceived as engaging in socially responsible behavior.232 As he noted, “people want to be in a company that stands for something.”233 He argued that because employees spent significant amounts of time at work, they desired their work environment to be more aligned with their values, which extended beyond making money.234 Another officer asked, “[h]ow can a company that is a collection of individuals be anything other than a reflection of those people and their values?”235 Thus, corporate rhetoric embracing a commitment to others regarding behavior and values may reflect a response to employee concerns.

The presence of rhetoric within business schools reveals that the rhetoric is aimed not simply at current workers but also at this nation’s future employees and executives. Increased electives and conferences featuring stakeholder concepts at business schools support this understanding.236 The increase in student involvement in organizations addressing such principles furthers this notion.237 Hence, there appears to be a growing awareness that employees, both in the rank and file and at the executive level, desire their corporations to engage in socially responsible behavior. Corporate rhetoric directed at employees reflects this awareness.

From this perspective, the primary goal of corporate rhetoric may be to attract and retain employees. In an increasingly competitive market, executives suggest that they must engage in behavior that attracts the best and most qualified employees.238 As Valero Energy’s annual report explains, “if you take care of employees, they’ll take care

230. See Newburg, supra note 135. Also, the annual report of Citigroup appears aimed at employees because it discusses meetings held with employees designed to foster values and appreciation of employee efforts. See CITIGROUP, INC., supra note 191. 231. See Panel Discussion at the Harvard Law School, Celebration of Black Alumni, Lawyers as Leaders: Chartering the Course of America (Sept. 17, 2005). Panelists included Lloyd C. Blankfein, President and Chief Operating Officer, The Goldman Sachs Group, Inc.; Debra L. Lee, President and CEO of Black Entertainment Television (BET); Adebayo O. Ogunlesi, Executive Vice Chairman and Chief Client Officer, Credit Suisse First Boston; and Clarence Otis Jr., CEO of Darden Restaurants Inc. 232. Lloyd C. Blankfein, President and Chief Operating Officer, The Goldman Sachs Group, Inc., Lawyers as Leaders: Chartering the Course of America, Remarks at the Harvard Law School Celebration of Black Alumni (Sept. 17, 2005). 233. Id. 234. Id. 235. Adebayo O. Ogunlesi, Executive Vice Chairman and Chief Client Officer, Credit Suisse First Boston, Lawyers as Leaders: Chartering the Course of America, Remarks at the Harvard Law School Celebration of Black Alumni (Sept. 17, 2005). In a similar vein, Debra L. Lee, president and CEO of BET, agreed that engaging in socially responsible behavior makes the employees feel good about their work place. See id. 236. See supra notes 144, 148 and accompanying text. 237. See supra note 150 and accompanying text. 238. See supra note 232.



of the shareholders.”239 Certainly this rationale also aligns the rhetoric with profit-making concerns since no corporation can thrive without a viable workforce.

2. Rhetoric by Any Other Name...

The many audiences at which rhetoric may be aimed make it difficult to draw any unequivocal conclusions regarding its purpose. First, the mere fact that rhetoric could be aimed at a multitude of audiences potentially obscures the precise purpose of the rhetoric.

Second, evidence exists that suggests that stakeholder rhetoric may not be aimed at the particular audiences identified above. For example, the fact that corporate rhetoric can be found in documents and venues not typically associated with customers or employees, such as corporate governance principles and annual reports, undercuts the notion that the rhetoric is aimed exclusively at those groups. Then too, to the extent that the rhetoric is aimed at federal regulators, one would expect to find a difference between the rhetoric adopted by public companies—that are subject to greater federal regulation—and private companies. Available studies do not support this expectation; instead they reveal that both public and private companies have adopted stakeholder rhetoric.240 This may undermine the extent to which one can claim that corporations engage in stakeholder discourse solely in order to respond to federal regulators. It also illustrates the difficulty with pinpointing the precise targets, and hence, the purpose of the rhetoric.

More importantly, while understanding the rhetor’s targeted audience may help identify rhetoric’s purpose, it nevertheless highlights the fact of the rhetoric’s appeal to that audience. Hence, even if it is clear that federal regulators and the judiciary represent one of the audiences at which corporate rhetoric is aimed, this reflects a corporate assessment that the government and judiciary value other-regarding behavior. This assessment is important because while advancing such concerns may be permissible, there is no statutory or judicial requirement for such behavior. In this regard, while corporations may conclude that it is necessary to advance some rhetorical response to the judiciary or regulators in an effort to neutralize any threat to their authority, a focus on stakeholders is not the inevitable result of that conclusion. Therefore, corporate adoption of stakeholder rhetoric illustrates corporate belief that government officials and judges prefer the kind of behavior that such rhetoric purports to advance.

In addition, even if one accepts that corporations adopt stakeholder rhetoric to attract employees and customers—and hence enhance their profit-making capabilities—turned on its head, this acceptance reflects corporate acknowledgement that customers and employees gravitate towards companies that engage in other-regarding rhetoric and its corresponding behavior. Indeed, the CEO of Darden Restaurants indicated that companies engaged in the service industry must focus on more than just profit in order to be viable.241 Similarly, adoption of rhetoric within business schools suggests an understanding that future business leaders find the rhetoric more palatable. On the one

239. VALERO ENERGY CORP., 2004 SUMMARY ANNUAL REPORT 19 (2005), available at http://www.valero.com/docs/InvestorRelations/AnnualReports/2004AR.pdf. 240. See KELLY ET AL., supra note 122, at 3 (finding no difference between the focus on values of public and private companies). 241. See Clarence Otis, Jr., CEO of Darden Restaurants Inc., Lawyers as Leaders: Chartering the Course of America, Remarks at the Harvard Law School Celebration of Black Alumni (Sept. 17, 2005).



hand, it may be true that corporations adopt the rhetoric for profit-making reasons, thereby undermining the extent to which we can expect the rhetoric to have any impact on corporate behavior. On the other hand, the adoption reveals its appeal to a variety of different groups, and indicates such groups’ normative preferences for the stakeholder theory.

3. Rhetoric Aimed at Investors and the Business Community

Finally, and perhaps most importantly, by aiming their stakeholder talk at investors, corporations appear to include investors within the groups desirous of that talk. First, the inclusion of stakeholder rhetoric in annual reports and on those portions of the websites specifically targeting investors suggests that corporations believe investors respond favorably to such rhetoric.242 Indeed, given that the vast majority of corporations specifically address their annual report to shareholders, it appears relatively clear that any rhetoric in that report is directed at them. Similarly, a significant amount of stakeholder rhetoric can be found under the website heading “Investor Relations,” a site clearly directed at the investment community. Second, the fact that several corporations have board committees aimed at addressing these issues further evidences corporate belief that such issues resonate with their investor community. Third, stakeholder rhetoric can be found within the corporate governance principles of several business groups. Rhetoric in these venues appears to be intentionally and specifically aimed at shareholders.

Aiming the rhetoric at the investment community suggests corporate assessment that even these critical groups find that rhetoric acceptable, if not more palatable, than shareholder primacy. Indeed, annual reports, which present a year-end review of the corporation’s business activity and often accompany proxy statements for the annual election of directors, are clearly designed to validate the corporations past and future activities. To that end, corporations adopt language in the annual report that they believe will appeal to shareholders. In this sense, the adoption of stakeholder rhetoric in the annual report represents a deliberate decision regarding that rhetoric’s acceptability to shareholders. Similarly, the inclusion of stakeholder rhetoric on “Investor Relations” websites represents a conscious effort on the part of corporations to present discourse that shareholders will find appealing. In this regard, the rhetoric aimed at shareholders reflects a deliberate assessment by corporations that investors appreciate, and in some instances prefer, stakeholder concepts.

D. Short-Term Life of Rhetoric

It is entirely possible that the current corporate rhetoric focusing on stakeholders represents a temporary response to negative publicity associated with corporate wrongdoing. Indeed, history reveals that such rhetoric not only appears in cycles, but also that it becomes more pronounced during times of scandal or corporate crisis.243 This history supports the notion that once the crisis wanes, such rhetoric may wane as well.

However, even if one concedes that society only embraces stakeholder rhetoric

242. See infra Appendix A (noting that 13 companies link information regarding other stakeholders to their respective investor relations sites). 243. See supra notes 211-212.



during times of corporate misconduct, that embrace suggests that there are at least periods of time when the shareholder primacy rhetoric is less palatable than a rhetoric and norm which focuses on stakeholders. In this regard, the embrace of stakeholder rhetoric highlights the at least intermittent dissatisfaction with the more traditional norm.

Then too, at some level, the embrace of stakeholder rhetoric during corporate crisis should be especially troubling for advocates of shareholder primacy because it symbolizes the failure of the shareholder primacy norm as a constraining influence, while indicating societal belief that the norm may be insufficient to guide corporate conduct during its more critical time periods. The fact that society appears to equate the stakeholder norm with more ethical and altruistic principles supports this indication. Just as people reveal their true character during times of crisis, one can assert that institutions and societies also gravitate towards their “true” ideals during such times. In this regard, the fact that stakeholder rhetoric emerges during those times strengthens the claim that society and investors find the norm embodied within that rhetoric to be a better expression of their normative ideal of corporate conduct. Hence, even if one concedes that the corporate embrace of stakeholder rhetoric is a temporary response to corporate crisis, the fact that corporations fall back on such rhetoric during these times, and shy away from shareholder primacy rhetoric, at least merits our attention and further scholarly discussion.

E. Concluding Thoughts on the Normative Impact of Stakeholder Rhetoric

Corporate rhetoric is intrinsically valuable because it reflects corporate expression of the preferred normative principle governing corporate conduct. As such, the recent embrace of stakeholder rhetoric reveals a normative preference for behavior that considers, and in some cases favors, other groups—a preference that is at odds with shareholder primacy, at least in its absolute form. While the varying audiences at which corporations direct the rhetoric may indicate that such entities adopt the rhetoric for less than altruistic purposes, it nevertheless demonstrates that various groups find stakeholder rhetoric appealing. Even if that appeal is only temporary, the rhetoric is important because it reveals some societal and investor discontent with the normative idea that the sole or primary objectives of corporations should be to maximize shareholder profit.

V. CONCLUSION

Many commentators have acknowledged a growing embrace of stakeholder rhetoric. This embrace is reflected within corporate documents, mission statements, and even at business schools. Indeed, it is difficult to navigate today’s corporate arena without being confronted—and some might say bombarded—with notions of corporate responsibility, charitable giving, and good citizenship. By contrast, the emphasis on shareholder profits appears to be buried amidst the rhetoric.

Yet stakeholder rhetoric seems at odds both with traditional notions of corporate obligation and with current corporate conduct. While some groups of corporate scholars have always endorsed stakeholder theory, it has been understood that shareholder primacy—the obligation to maximize shareholder value—reflects the guiding principle for corporate actors. The dominance of the shareholder norm is underscored by its rhetorical embrace in the face of legal doctrine that appears to allow corporations to



pursue stakeholder principles in practice. In this regard, the embrace of stakeholder rhetoric reflects a shift in corporate dialogue.

In contrast to those who discount this shift, this Article argues that the rhetorical embrace of stakeholder rhetoric has important normative repercussions. Focusing on the intrinsic value of rhetoric as a persuasive and expressive device, this Article argues that such rhetoric reveals normative dissatisfaction with shareholder primacy that extends to both customers and employees as well as the business community and investors. Even if temporary, the rhetoric reveals some societal and investor discontent with the prevailing shareholder primacy principle.



APPENDIX A: DATA ON STAKEHOLDER RHETORIC IN FORTUNE 100 COMPANIES

This study reflects data from Fortune 100 companies as identified in the April 2005 list of Fortune 500 companies in Fortune magazine. Data was gathered from the most recent annual reports and proxy statements of such corporations as well as corporate websites and corporate press releases. This study uses the term “stakeholder rhetoric” to refer to language that focuses on corporate constituents other than shareholders, including employees, creditors, customers, and the community. Such rhetoric also includes discussion of corporate social responsibility.

Table 1 presents data on the presence of stakeholder rhetoric within corporate documents, websites, or by corporate board committees of Fortune 100 corporations. “AR” represents annual report; “SR” represents a social responsibility or good citizenship report; “WS” represents website; “BC” represents board committee; “Link” represents corporations that link information regarding social responsibility issues to their investor relations website.

Table 1

No. Company AR SR WS BC Link

1 Wal-Mart √ √

2 Exxon Mobil √ √ √ √ √

3 General Motors √ √ √ √

4 Ford √ √ √ √ √

5 General Electric √ √ √ √ √

6 Chevron Texaco √ √ √ √ √

7 Conoco Phillips √ √ √ √

8 Citigroup √ √ √ √ √

9 AIG √

10 IBM √ √ √ √

11 Hewlett Packard √ √ √ √

12* Berkshire Hathaway



13 Home Depot √ √ √

14 Verizon √ √ √ √

15 McKesson √ √

16 Cardinal Health √ √

17 Altria Group √ √ √

18 Bank of America √ √ √

19 State Farm √ √

20 JP Morgan √ √ √ √

21 Kroger √ √

22 Valero √ √

23 Ameri-Source √ √

24 Pfizer √ √ √

25 Boeing √

26 Procter & Gamble √ √ √ √ √

27 Target √ √ √ √ √

28 Dell √ √ √ √

29 Costco √

30 Johnson & Johnson √ √ √ √

31 Marathon Oil √ √ √

32 Time Warner √

33 SBC √ √

34 Dow Chemical √ √ √ √

35 Albertsons √ √



36 Morgan Stanley √ √ √

37 MetLife √ √ √

38 Walgreens √ √

39 United Technologies √ √ √ √

40 United Health Group √ √

41 Microsoft √ √ √ √

42 UPS √ √ √ √

43 Lowe’s √ √

44 Archer-Daniels-Midland √

45 Sears √ √

46 Safeway √ √

47 Lockheed Martin √ √ √ √

48 Medco √

49 Motorola √ √

50 Intel √ √ √ √

Total Number 44 29 43 19 13

Percentage 88% 58% 86% 38% 26%

* Represents the only Fortune 100 company for which stakeholder rhetoric was not

found in any corporate document or on its website. Table 2 presents data on the presence of stakeholder data within annual reports of

Fortune 100 companies by demonstrating the relative pages on which the data appears within the report. “W/5 pgs” represents stakeholder rhetoric that appears within the first five pages of the report; “1st pg” represents stakeholder rhetoric that appears on the first or cover page of the report; “Opening LTR” represents corporations that address their annual report to a non-shareholder group.



Table 2

No. Company W/5 pgs 1st pg Opening LTR

1 Wal-Mart √ √

2 ExxonMobil

3 General Motors √

4 Ford √

5 General Electric √ √

6 ChevronTexaco √ √

7 ConocoPhillips √ √

8 Citigroup √ √

9 AIG-N/A

10 IBM

11 Hewlett Packard

12 Berkshire Hathaway-N/A

13 Home Depot √ √ √

14 Verizon √

15 McKesson

16 Cardinal Health √ √ √

17 Altria Group

18 Bank of America

19 State Farm √



20 JP Morgan

21 Kroger √

22 Valero √

23 AmeriSource √

24 Pfizer √ √

25 Boeing √ √ √

26 Procter & Gamble √

27 Target √ √

28 Dell √ √ √

29 Costco √

30 Johnson & Johnson √ √

31 Marathon Oil

32 Time Warner √

33 SBC

34 Dow Chemical √

35 Albertsons √ √

36 Morgan Stanley √ √

37 MetLife √ √

38 Walgreens √ √

39 United Technologies √

40 United Health Group √ √



41 Microsoft √ √

42 UPS √

43 Lowe’s √

44 Archer-Daniels-Midland

45 Sears √

46 Safeway √

47 Lockheed Martin √ √

48 Medco √ √ √

49 Motorola

50 Intel √ √

Total Number 37 18 8

Percentage 74% 36% 16%

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