Since the 2008 financial crisis, a growing number of advocates and scholars have argued that companies have responsibilities to a range of different stakeholders, including their employees. The opposing camp believed that shareholders came first: they were the owners of the company and should ultimately decide how it acted.
But a divide is forming among those who claim to hold on to the idea of shareholder primacy – the idea that a company should only serve its investors. And it widened again last month when oil giant ExxonMobil sued two of its shareholders, Arjuna Capital and Follow This, to stop them from tabling climate-related resolutions at its shareholder meeting.
But what do shareholders really want and can companies ever ignore them? Arjuna and Follow This own Exxon shares and attempt to dictate the energy giant’s behavior. However, they are demanding more than just dividends: They want Exxon to commit to more ambitious emissions reductions, and for some that is just as bad as companies admitting their commitment to workers or the community.
It’s not unusual for a company to reject a shareholder proposal, but it’s unusual for it to sue. Exxon’s decision to do this for the first time underscores a new and fascinating disagreement over when, if ever, a company can overrule its investors.
“The social responsibility of business is to increase profits,” argued Milton Friedman in his famous 1970 essay, a canonical exposition of shareholder primacy. This view usually contrasts with the stakeholder model, where companies have broader obligations – but there is a third perspective that is gaining influence. It says that shareholders are in charge, but of course they have a number of goals, of which profit is just one. After all, investors are people too. This view has been put forward by economists Oliver Hart and Luigi Zingales in a series of articles. (Disclosure, I worked for Zingales’ center at the University of Chicago and edited his and Hart’s article for Harvard Business Review.)
The theory is not mere speculation. In fact, the shareholders are Do take care of multiple goals; Their preference for profits over other social values is a matter of degree and not binary.
Shouldn’t advocates of shareholder primacy allow companies to pursue social goals when investors ask them to?
Friedman, who was more concerned with poaching executives than investors, assumed that shareholders would primarily seek profits. However, he acknowledged that they might set up companies with different goals and that they would want the companies they invest in to abide by the law and “ethical practices.” His opinion on this was a bit unclear. On the one hand, in his essay he criticized activist shareholders who wanted to encourage their fellow shareholders to vote for social goals. On the other hand, he insisted that shareholders have the final say: “The crucial point is that the manager, in his capacity as a corporate director, is the representative of the people who own the company… and his primary responsibility is to them.”
This tension in Friedman’s thinking has now led to disagreement within the anti-stakeholder capitalism movement. Hart and Zingales argue that shareholders come first, but that companies must maximize their overall welfare, not just their profits. Meanwhile, Exxon’s lawsuit—like the backlash against environmental, social, and governance (ESG) investing more broadly—shows that some of the support for shareholder primacy is highly conditional—better described as profit primacy . From this perspective, shareholders only come first when they keep their mouths shut and pay out the dividends.
Arjuna and Follow This quite reasonably suggest that Exxon’s emissions targets, like all other Western oil companies, include not only its own operations, but also the emissions produced when a customer burns the oil (also known as Scope 3 emissions ).
Exxon claims that this “does not serve the interests of investors.” Why don’t we let shareholders decide for themselves what is in their interests and what is not? Exxon argues that the proposals are a form of micromanagement – one of several criteria that would allow a company to ignore such a proposal. The normal process for this is for a company to file a letter with the SEC explaining why the proposal violates the rules. The SEC can then respond with its own “no-action” letter stating that it will not penalize the company for ignoring the proposal.
What’s at stake goes beyond Exxon
The problem for Exxon is that in 2021 the SEC clarified how it would respond if such inquiries concerned the definitions of “micromanagement” and “normal business.” It said shareholders had the right to submit a proposal that “raises issues with far-reaching societal implications so that they go beyond the company’s normal business.” It also said it would not consider proposals related to “climate targets or timelines” as micromanagement “as long as the proposals allow management discretion over how to achieve those targets.” Arjuna and Follow This’s proposal is unlikely to be micromanagement in the eyes of the SEC; Exxon hopes a judge will think otherwise.
This is about more than just a single company. Even if a judge rules against Exxon, its shareholders will likely vote against the proposal as before. But in what world is it micromanagement to demand that Exxon address the effects of burning oil? Whatever one thinks Exxon should do, it’s certainly not a mere detail.
Proponents of profit primacy want to limit the range of shareholder contributions so that increasing anything beyond the bottom line is considered illegitimate. And Friedman’s 1970 essay provides a clue to what this camp fears most. Friedman was concerned about the tangible results of corporate social activism – he characterized the social whims of executives as a form of taxation and spending without a proper political process. But he also feared that any consideration of social conscience in economics would be followed by regulation to achieve the same: “Once this view is adopted, the external forces that restrain the market will no longer be the social conscience of the pontificate , however sophisticated it may be.” Managers; it will be the iron fist of government bureaucrats.”
That’s probably what Exxon and its anti-ESG allies fear most. If activist investors show that even many shareholders are dissatisfied with their vision of the energy future, government action will not be long in coming.
Walter Frick is an editor at Harvard Business Review and reporter in residence at the Omidyar Network. He was previously editor-in-chief of Quartz.
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