The Business of Business

An old debate about what companies are for has been revived

In 2000 two American law professors, Henry Hansmann of Yale University and Reinier Kraakman of Harvard, pronounced that the most hotly-contested debate in corporate law had been resolved. For decades conservatives and progressives had argued over whether the purpose of a company is to maximise shareholder value or pursue broader social ends. Now, the conservatives had won. Anglo-Saxon capitalism was sweeping all before it. And the world’s legal systems were converging on the shareholder-value model. The duo could hardly have been more unlucky in their timing. Not long after their article was published, several companies that proudly practised shareholder-value maximisation went up in flames: Enron, Arthur Andersen and WorldCom, among others. Six years later the collapse of Lehman Brothers triggered a global crisis. Jack Welch, GE’s former boss and a poster boy of the conservative school, said pursuing shareholder value as a strategy was “the dumbest idea ever”.

Defenders of the model might retort that a few bad apples don’t spoil the bunch. These have now been dealt with and the laws strengthened. But the shareholder-value model has conceptual as well as practical problems. Its proponents argue that companies are owned by shareholders, when in fact they are “legal persons” that…