Who are companies for?

The Centre for Corporate Governance asks who a company should be run for - shareholders or society?


The Extinction Rebellion protests, which brought busy road junctions in London to a standstill this Spring, are among a number of events erupting from the politically frustrated margins.

Anger is bursting through across the political spectrum from the Gilets Jaunes, Brexit, Bolsanaro, Duterte and Trump and while their analyses are quite different, these diverse movements are often angry with big business. In many eyes business serves business, takes short term views, enriches a global wealthy elite and doesn’t serve wider stakeholders in society.

How can trust be regained? Does a company run for its shareholders need a fundamental overhaul?

Alex Edmans, LBS Professor of Finance and Academic Director of the CCG, argues the debate should not be hijacked by caricatures of big business and ill-informed solutions, but draw upon the best research. He has argued that business can take into account all stakeholders in a way that does not eschew profits. A profitable company can grow returns for shareholders and wider society.

Shareholder wealth maximisation

Diane Denis, Katz Alumni Chair in Finance, University of Pittsburgh, argues that there is less difference between shareholder wealth maximisation and maximising benefits for wider society than commonly thought. In fact by using shareholders’ interests as a decision rule is a good way of protecting the interests of all stakeholders.

“I would argue there's a lot less conflict between those models than people realise,” she says. “I don't think that the goals of the corporation and the good of the society are in conflict all that often.


Who are companies for? Should they be run for shareholders? Or for society as a whole? In this wide ranging discussion a group of experts gather at LBS for the Centre for Corporate Governance to share the latest thinking on this salient issue of our times.

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“I don't think that the goals of the corporate and the good of the society, are in conflict all that often.”

“Shareholder wealth maximisation is misunderstood because it stems from the idea that shareholders are the residual claimants on the firm cash flows, so they get paid after everybody else does. This does not say that shareholders are the only ones that matter. This says we're going to maximise what's left. I would say that this notion of shareholder primacy is a misnomer, that the model does not suggest that that shareholders are more important than other stakeholders.

“I think that the shareholder governance model is the model that we need to follow. It's important that the shareholder governance model gives managers a clear decision rule. Managers cannot maximise conflicting objectives. This is good. Not only this, this protects the shareholders, as well as all those stakeholders ahead of them, from self-interest on the part of managers.

“I want to ensure what the company does makes me proud, and that everyone who is associated with that company gets the best reward.”

“The moment that we start holding managers to fairly vague and unspecified decision rules, we are asking for an increase in agency problems. So I think shareholder governance is important to corporate success. And corporations are important to society.”

Mark Garratt, Group CFO at Harvey Nash, said shareholder maximisation gave little credit to managers: “I love doing what I do, and maximising how much of the revenue gets turned into profit, of course, is one of the things that my job is all about. But what I also want to ensure is that what the company does makes me proud, and that everyone who is associated with that company gets the best reward. The concept that shareholders should get the maximum out and everyone else should only be paid just more than they can get somewhere else, doesn't sound fair to me.

“I do take offence to the concept that a management team can't have more than one objective in mind, it would be a very boring job, if all I was concerned about was one number in my business all day long. “There needs to be other ways to moderate what is in the end an incentive to act against everyone else other than the shareholders. And if management is too closely aligned to those shareholder values, rather than all other stakeholders, you get this dichotomy that I think is toxic.”

Conor Kehoe, Senior Partner Emeritus and Special Adviser at McKinsey, agrees that companies need to serve society but he doesn’t see it as incompatible with shareholder maximisation: “I do think there is a problem in the transmission mechanism. That is to say, investors talking to boards, boards influencing or directing companies. And, and I believe this transmission mechanism is under motivated and under resourced.

“I also feel it's been misled by one element of theory which is the notion of a perfect or a near perfect market.

“Because too often, it is translated into advice to directors, that if whatever decision you make sends the share price down, you'll be open to litigation, if the share price goes up, you'll be just fine. So it makes them quite short-term in their decision making.”

Professor Denis concedes the shareholder governance model needs to more effective through an ongoing dialogue between managers and stakeholders: “We need market participants, including managers and boards of directors, to understand that appropriate treatment of stakeholders actually is in shareholders economic interests. We need transparency and information dissemination. We need enforcement of the laws across the board. I think this is a big one. And finally, we need an ongoing dialogue that allows us to identify where the goals of the corporation and the goals of society actually are in conflict, and how best to deal with those conflicts.”

The London Business School Centre for Corporate Governance seeks to put rigorous research into the heart of the big debates. Its mission is to generate a dialogue between academics and business practitioners, to influence the way businesses are run.

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