In this chapter we establish the foundations for extracting principles of contemporary corporate governance. We begin the chapter by providing our own definition of the term ‘corporate governance’. The reason for this is to enable the reader to gain a good understanding of how we approach the principles of contemporary corporate governance in this book. We have adjusted the definition of corporate governance in each of the previous four editions, as well as in this edition. The reason is that corporate governance is a dynamic concept and we strive to keep the definition updated to reflect contemporary principles of corporate governance.

If a firm is a nexus of contracts, then it is just the sum of its counterparties. It follows that when a firm monopolizes a particular market and exploits its power to impose unfavourable terms on a counterparty, the firm necessarily exploits one counterparty for the benefit of another, because the additional profits the firm generates from the unfavourable terms must be paid out eventually to some other counterparty of the firm. One alternative to attacking monopoly power through breakup of large firms or limits on anticompetitive conduct in the marketplace is therefore to prevent any one counterparty of the firm from so dominating firm governance as to be able to induce the firm to oppress other counterparties for its benefit. Creating a balance of power in firm governance, by giving each class of counterparties (i.e., workers, suppliers, investors, and consumers) an equal say over the choice of board members, would eliminate the internal forces that induce firms to exercise monopoly power. But it would not prevent firms from engaging in productive, pie-expanding, behaviour, because such behaviour tends to expand the business that the firm does with all of its counterparties—or at least enables the firm to use a share of the gains to compensate those counterparties that lose out—and therefore benefits them all.

Sunita Malepati’s commentary describes how number of minority shareholders brought suit against a family-owned supermarket, Market Basket, with a history of treating employees and other stakeholders well. A group of minority shareholders had offered to sell their shares to a third party, and CEO Arthur T. Demoulas resisted, arguing that the shareholders could not sell their stock if it would imperil the corporation’s tax status. The original opinion found that the shareholders could sell their shares to whom they pleased, regardless of how it might impact the corporation. The feminist judgment rejects the original opinion, applying a feminist ethic-of-care lens and embracing a feminist-informed stakeholder theory of corporate governance. Rather than replicating the shareholder primacy model’s privileging of shareholder-owners, the feminist judgment vindicates the interests of the corporation’s employee-stakeholders and community the corporation serves—each ethnically and socioeconomically diverse groups.

Revlon, Inc. v. MacAndrews & Forbes Holdings is a landmark decision setting shareholder primacy as the main concern in M&A transactions. The Delaware Supreme Court held that directors “are charged with the duty of selling the company at the highest price attainable for the stockholders’ benefit.” Professor Christina Sautter, as Justice Sautter in her rewritten feminist judgment on the case, takes the position that the interests of other constituencies should be taken into account to consider the long-term health of a company best. In her commentary on Justice Sautter’s opinion, Professor Afra Afsharipour also emphasizes the masculine norms of takeover contests and how the masculine traits of authoritarianism, paternalism, and informalism motivated the Revlon acquisition discussions. Justice Sautter suggests that when these masculine traits interfere, short-term shareholder wealth maximization usurps the company’s long-term interest. Sautter leans on the fact that a small group of men made all of the decisions for a cosmetic company whose customers are predominantly female to reveal the importance of stakeholder interest in a takeover contest. A feminist perspective that appreciates complex relational factors could have influenced the board’s decisions to maximize value in the long-term.

This chapter by the volume editors provides an overview of the volume and its relationship with the global and U. S. Feminist Judgments Projects. It explains how cases were selected and the parameters were provided to authors and commentators. The introductory chapter also identifies common themes and feminist methods in the rewritten opinions and locates this work in the context of larger concerns about gender equality and justice.

The plaintiffs, John and Horace Dodge, owned a ten percent share in the defendant’s, Ford Motor Company (FMC), corporation. The Dodge brothers had recently started their own car company, but the Dodge Brothers retained interest in FMC, which had paid hefty dividends. Henry Ford very publicly decided to stop paying dividends to investors and to build a new plant in River Rouge, Michigan, which would drive competition for lower priced vehicles. The Dodge brothers filed this suit in response. The case highlights the debate over the fundamental purpose of business: investor benefit or societal benefit. Through the lens of feminist theory, Ford’s approach would promote both the financial interests of FMC and the equitable access to private transportation to the betterment of society. By withholding dividends, FMC could maintain a cash reserve in times of financial adversity; meanwhile, by driving down the price of cars, private transportation could be more widely available to even the most marginalized groups who were more likely to experience harassment on public transportation. The feminist perspective argues that the notion that a corporation’s only purpose being to immediately maximize profits for the sake of stockholders is too narrow a view.

The US is often placed within a liberal-utilitarian model and the EU is often positioned within a social model. In corporate law theory, this distinction is presented as contractarianism versus communitarianism. The latter has traditionally represented the EU’s approach to corporate regulation, while the former represents the US approach. Rather than adhere to such neat divisions and other binary choices such as regulatory models versus voluntarist models such as the corporate social responsibility model, this chapter argues that the true resolution of difficulties associated with capitalism lies in the development of a new theoretical framework driven by an ethical challenge to those acting behind the corporate veil or under its shadow. This chapter exhorts that if we move on from binary divisions and present a meaningful ethical challenge to corporate actors such as shareholders and management, we can ensure better outcomes.

In Chapter 2 I discuss how boards can work on the company’s purpose and shift their attention from profit maximization alone to become a purpose-driven organization. A corporate purpose offers a concise explanation of why a company exists and what it intends to do for customers, employees and society in a sustainable way. It provides a frame for shareholder and stakeholder expectations. With the growing emphasis on sustainability and ESG dimensions, firms need to develop an overall purpose-driven framework to ensure these pieces fit together and are well integrated into the firm’s strategy. Boards should learn how to work with the firm’s purpose, make it consistent with the firm’s strategy and understand how their work can reinforce or erode corporate purpose.

Chapter 1 offers an overview of recent corporate crises and their relationship with the dominant model of boards of directors. I also present a brief historical review of boards of directors and explore why the current generation of boards that was born in the 1990s has fallen short of its expectations. Understanding why the current model has not been effective is relevant. In parallel, a close-up view of the inner workings of some boards sheds additional light on a conundrum overlooked by large-sample statistical studies. A board should understand the company’s business and the industry in which it operates, make sure its long-term orientation is sound and expand their scope beyond simple shareholder value maximization.

‘Shareholder democracy’ and ‘corporate purpose’ are concepts periodically cited in the context of dual-class stock.Shareholder democracy, and the contention that one share, one vote is democratic or just plain fair, although an elegant soundbite, has been disputed, with many commentators opining that one share per shareholder is a better representation of democracy, and that analogies between corporate governance and political theory are built on fragile grounds.In relation to corporate purpose, commentators have vacillated between ideologies of shareholder primacy and stakeholder pluralism over the years, with numerous ‘theories of the firm’ being proposed to justify, often opposing, ideals.However, the United Kingdom’s regulatory environment prioritises shareholders, the premium tier prohibition on dual-class stock stems from a presumption that it harms public shareholders and institutional shareholders, who are traditionally antagonistic to dual-class stock, enjoy significant influence on the UK public markets.Therefore, whatever one’s predilections on the shareholder primacy/stakeholder pluralism debate, when considering dual-class stock, the impact on public shareholders is key.Additionally, although Big Tech has attracted a hostile press in recent years, the potentially pernicious dominance of large tech companies is not an attribute unique to dual-class stock, and, in fact, dual-class stock could inspire greater competition in the industry.

The goal of the business corporation traditionally has been understood to be the maximization of shareholder wealth. A growing demand for social enterprise has led to the creation of various new forms of business organization, including the benefit corporation, that have the goal of creating both shareholder wealth and other public benefits. Although benefit corporations were developed to overcome the shareholder wealth maximization norm, it is not fair to say that they also overcome shareholder primacy. Properly understood, benefit corporations are shareholder-centric: they exist to allow shareholders to pursue altruistic goals rather than to require them to do so. This essay demonstrates this from the history and structure of the Model Benefit Corporation Act and argues that benefit corporation legislation ought to remain essentially enabling rather than mandatory in nature.

Chapter 2 assesses dominant corporate theories and norms such as shareholder primacy and shareholder wealth maximisation through the lens of climate change. It describes the ascent to dominance of these theories through the historical diversification of shareholder ownership and issue of agency costs. It highlights the three major negative contributions these theories have made to the issue of climate change: the elevation of the interests of shareholders to the detriment of non-shareholders, the fostering on a short-term approach to profit-making and finally the externalization of greenhouse gas emissions. The chapter then assesses competing theories of the corporate form which focus on stakeholder interests and the company as an entity, and how these theories provide a more holistic and appropriate model of the company in the context of climate change. The chapter concludes with the UK enlightened shareholder value approach and the US shareholder-centric approach to company law. While the United States has a more entrenched version of these dominant corporate theories such as shareholder wealth maximisation, even in this jurisdiction recent developments such as the Business Roundtable statement in 2019 illustrate discursive movements away from a shareholder-centric approach in the business world.

This introductory chapter frames the issue of companies and their role in the climate crisis. It lays out the science of climate change and the causal connection between the historic and present contributions of companies to climate change through their greenhouse gas emissions. The chapter highlights the global temperature goals under the Paris Agreement and the consequential emission reductions it necessitates. This chapter also introduces some key concepts in company law theory such as shareholder primacy and shareholder wealth maximization and their role in Anglo-American company law. The chapter provides an explanation of a number of corporate forms, including traditional for-profit corporate models (both private and public) as well as a variety of hybrid and social enterprise forms. The imperatives of profit making, as illustrated by dominant corporate norms, are relevant (in varying degrees) to all of these corporate forms. The chapter concludes with a summary of systemic barriers of short-termism as well as opportunities such as corporate social responsibility and societal expectations which surround companies in the context of climate change, and why the United Kingdom is used as a model jurisdiction.

This chapter provides an introduction to the basic structure and themes of the book. We begin with a description of the basic features of a corporation. We then discuss the intellectual foundations of corporate governance, including an overview of the doctrine of shareholder primacy and the view that a corporation is merely a nexus of contracts. We begin to catalog some of the cracks in these foundations, focusing on the shortcomings of the long-standing arguments for the exclusive shareholder franchise. Next, we make clear that our the criticisms of shareholder primacy and the exclusive shareholder franchise do not question, but indeed make extensive use of, the basic principles of standard economics and social choice theory. In other words, both our critique and our positive theory come from within the very tradition that gave rise to the original arguments for shareholder control. We conclude the chapter with a detailed plan for the rest of the book.

In the preface, we set the stage for the rest of the book. Corporations have a tremendous amount of power and play a major role in a number of contemporary issues, including income inequality, global warming, and the financial crisis. The principal theory of corporate governance – shareholder primacy – is well entrenched in law and practice, but its intellectual foundations are falling apart. Academic groups are split into different camps advocating for more or less shareholder empowerment. The traditional, law and economics arguments for the core governance feature – the exclusive shareholder franchise – have been revealed to rest on faulty assumptions and flawed reasoning. And both corporate governance theorists and corporate and economic luminaries are openly questioning the stability of shareholder primacy as a continuing regulatory norm. There are, however, a dearth of alternative approaches, so shareholder primacy lumbers on toward the point of crisis. It is time to assess where we are and offer a new way forward.

In this concluding chapter, we note some of the societal problems associated with corporations, such as income inequality, and explore the relationship between those problems and the fact that shareholders have ultimate control of corporate decision-making. We then catalog the ways in which the theoretical underpinnings of this arrangement – shareholder primacy – appear to be in decline and the accompanying law and economics arguments in favor of the exclusive shareholder franchise have fallen apart. The chapter, and the book, conclude with some thoughts about how incorporating employees into firm governance is the best path forward.