Corporate Purpose in a Post-Covid World

MALCOLM S. SALTER

Summary

The canonization of shareholder wealth maximization as the only legiti­mate expression of corporate purpose has contributed to a widening gulf between what the capital market values and what people value.

Introduction

In April 2020, the former governor of the Bank of England, Mark Carney, pre­dicted that “value will change in the post-Covid world...

The possibility of our capitalist economy yielding more to human val­ues is surely to be wished for. But narrowing the gulf between what markets value and what people value will be as difficult as it is necessary.

It is pretty clear, for example, what the capital markets value: increasing returns to shareholders. Despite the vast academic literature and many man­agement testimonials advocating broader conceptions of corporate purpose, shareholder wealth maximization remains the de facto expression of corpo­rate purpose for most publicly listed companies, especially in the US and UK, where this value-maximizing doctrine offers strong protection from the rela­tively unconstrained market for corporate control.²

While it is less clear what the general public values most, maximizing shareholder returns is not at the top of the list. More likely, especially in the aftermath of the Covid-19 pandemic that exposed and magnified long­standing social inequities, matters related to income security, economic op­portunity, and social justice are top of mind.

The inconsistency that currently exists between what markets value and what people value has become increasingly more troublesome over the past 40 years as shareholder wealth maximization has been canonized as the only legitimate expression of corporate purpose. Aggressive pursuit of this foun­dational doctrine has left a well-documented trail of corporate conduct and consequence that is incompatible with what many people consider to be the well-being of society.

The adverse effects of this incompatibility include major increases in in­come inequality and insecurity in an economy experiencing one of the fast­est growth rates in our history; persistent neglect of the natural environment and sustainability of the entire economy; rampant cronyism involving col­lusion among firms, their regulators, and Congress, resulting in policies and regulations that serve private shareholder interests at the expense of the so­ciety's well-being; widespread gaming of legislated rules and regulations that benefit corporate shareholders but offer few compensating public benefits; and inattention to the plight of capitalism's “losers," such as the underpaid and the forced unemployed—just to note a few.

Not surprisingly, the damaging side effects of relentless shareholder wealth maximization have contributed to a remarkable decline of public trust in large corporations—arguably one of America's most representative social institutions—and capitalism as a system of economic governance. Over the last decade, surveys by Gallup, Frank Luntz, Harvard's Institute of Politics, and the Edelman Trust Barometer have all shown that only about one in five respondents trust US big business and that throughout the in­dustrialized world only 20 percent of those surveyed feel that the current system of political economy is working for them. It is highly unlikely that these opinions will change in a post-Covid world.

Before the onset of Covid-19, many parties in both the business and aca­demic communities had become well aware that reform of American-style capitalism was becoming an ethical and political necessity. This realization has led more and more business leaders, including the Business Roundtable, to claim that shareholder profits can no longer be the primary goal of their large, public corporations.

For US companies that have somehow not heard this message, they are now hearing it loud and clear from both large asset holders (such as pen­sion funds, insurance companies, sovereign funds, and endowments) and large asset managers (such as BlackRock, Vanguard Group, and State Street Corp.) who collectively own one in five shares of the Standard & Poor's 500 (S&P 500). With the objective of improving the long-term financial sustain­ability of the funds they manage—by reducing the risk of their investments and increasing their resilience to changes in the political and regulatory environment—there is a surge underway in the amount of funds invested by large asset holders and managers on the basis of how they handle envi­ronmental, social, and governance (ESG) matters. In response to increased investor attention to the broad impact of corporations on society and the environment, ESG-oriented investing now tops $30 trillion—up 68 percent since 2014 and tenfold since 2004.The current capitalization of the global equity market is in excess of $80 trillion.

Central bankers are also beginning to assert themselves in the matter of long-term financial sustainability. The Bank of England and the central banks of France, the Netherlands, and Singapore have introduced “stress tests” on commercial banks seeking to discover climate-related credit risks embedded in their loan portfolios. In response to these tests, banks need to establish how their borrowers are managing current and future climate-related risks. This new discipline will have the inevitable effect of shifting the attention of corporate borrowers toward improved environmental sustainability and away from unconstrained shareholder wealth maximization.

This is promising news for those interested in closing the value gulf, and the trend may well be accelerating. In the same week Carney's column ap­peared in The Economist, the head of equities at Fidelity International wrote in a message to clients that “the silver lining to this unfortunate crisis is that society's focus on sustainability is about to go parabolic, not just in relation to dealing with climate change and reducing poverty, but in how companies treat all stakeholders, and critically their own employees.”

For such a shift in investment priorities to spread further through the public company economy, three matters need to be addressed straight on. As a first step, we need to understand why the shareholder wealth maximization doctrine is not appropriate, either theoretically or practically, as a principal guideline for the espoused purpose of publicly listed companies.³

Second, we need to consider an alternative guideline for corporate pur­pose, which can replace, or at least supplement, the shareholder wealth maxi­mization doctrine. This guideline needs to meet the twin tests of (a) satisfy­ing both what markets value and what people value and (b) serving practical business interests. The alternative guideline that I suggest is based on the moral principle of “ethical reciprocity,” an idea rooted in Aristotle's theory of reciprocal justice.

Third, two practical matters related to the adoption of ethical reciprocity as a guideline for corporate purpose also need to be addressed: how can “reci­procity practitioners” survive in a competitive world currently dominated by shareholder wealth maximizers, and what can those with the most power to determine the success or failure of any such reform effort do to change the behavior of executives and investors who may be deeply hostile to any retreat from shareholder wealth maximization.

The Problematic Canonization of Shareholder Wealth Maximization

The evolution of shareholder wealth maximization as the only legitimate ex­pression of corporate purpose can be traced directly to the proposition that shareholders own their corporations and that corporate executives should therefore run the corporation in their interest, meaning that their primary mandate is to maximize the value of the company's shares. And since share­holders are the residual bearers of risk in corporate activity—meaning that they could lose all their money without any recourse or appeal—corporate executives have an ethical obligation to protect shareholders from the “un­usual degree of exposure” that they have to the corporation.

By the early 1970s, however, there was increasing concern among econo­mists and finance scholars that what managers actually sought to do was to maximize their own self-interests before attending to the value of the firms for which they worked. But did managers actually revert to maximizing their own self-interest? Conversely, to what extent were managers truly loyal to shareholders?

In 1976, Michael Jensen and William Meckling addressed these questions in a landmark paper addressing the “agency relationship” that existed between shareholders and managers as agents of the shareholders. They also laid out a theory of the firm based on agency theory, which, among other major contri­butions, made the economic case for shareholder wealth maximization as the only legitimate expression of corporate purpose and the most effective tool for managing the agency relationship between shareholders and managers.

The Jensen and Meckling paper reflected a rich intellectual background that extended back in the history of economic thought to the self-interested model of humankind assumed by Jeremy Bentham and to Richard Coase's conception of the modern corporation as a “nexus of contracts,” or series of transactions bound by “contracts” with suppliers, customers, and other parties that agree to work together for mutual benefit. In the words of Jensen and Meckling:

It is important to recognize that most organizations are simply Iegalfictions which serve as a nexus for a set of contracting relationships among individuals.... The private corporation or firm is simply one form of a legal fiction which serves as a nexus for contracting relationships and which is also characterized by the existence of divisible residual claims on the assets and cashflows of the organization which can generally be sold without permission of the other contracting individu- als.''5 (original italics)

What is most notable about this theory of the firm is that it stands in sharp contrast to the older conception of the corporation as an entity cocre­ated by public authority (through state charter), which grants corporations and their managers the right to make money and operate within the con­straints of certain rules of game.

According to this new theory (and echoing the work of Nobel Laureate economist Oliver Williamson), firms are created when internalizing con­tracts between owners and various factors of production into a hierarchy is efficient—that is, when the benefits of coordinating these implicit and ex­plicit contracts and related activities in a hierarchy are greater than the costs of coordinating them through market-based transactions and when the value of the goods and services sold by the firm exceed the costs of the inputs used.

This basic idea about the nature of firms was at the core of Jensen and Meckling's theory, and it was very effectively enhanced and publicized by Jensen in a series of academic papers and management articles spanning 20 years of original thinking and scholarship. Jensen's theory posits that the efficient performance of this contractual firm requires the recognition that the primary interest of shareholders (principals) is the maximization of their wealth by professional managers (agents)—to whom significant decision rights have been delegated. The theory also argues that efficient performance requires that firms adopt a system of internal governance and control that supports this primary interest.

According to Jensen, the objective of such an internal governance and con­trol system is minimizing whatever agency costs exist when agents (directors and managers) behave in opportunistic ways that do not fully satisfy the inter­ests of the principals (shareholders). These agency costs—equal to the sum of the costs of monitoring managers incurred by principals, the costs of bonding managers' interests to those of shareholders incurred by the agents, and the residual losses from agency costs that cannot be controlled—arise naturally, the argument goes, because in real organizational life, managers of publicly owned firms, who possess substantial decision and control rights over corpo­rate resources, are rarely “perfect agents” for dispersed shareholders. This is because they do not receive the full benefits of the profits earned and therefore have incentives to extract perquisites from the firm at the expense of the firm's true owners. In other words, the incentives of managers and owners are not naturally aligned. Minimizing such agency costs therefore logically involves paying corporate managers in ways that tie their pay increases with share value, thereby aligning management incentives with the primary interests of shareholders—namely, the value of their investment expressed in stock price.

Agency theory immediately attracted enormous attention. Thirty years after its publication, the Jensen-Meckling article was the third most cited in major economics journals, and today more than 2,000 papers on the Social Science Research Network have “agency” in their title. The most significant management implication of this theory—that long-term wealth maximiza­tion for shareholders needs to be the primary metric for assessing the perfor­mance of business enterprise—also found a great deal of support in the finan­cial and business communities and among faculty members in many leading business schools. Despite Michael Jensen's observation in the Business Ethics Quarterly—25 years after his pioneering 1976 paper appeared—that share­holder wealth maximization is not a vision or even a purpose and that wealth (or value) maximization is only a standard for measuring corporate success, the performance measurement element of his management theory was, and remains, foundational to the “shareholder primacy” theory of the firm.

Much of the appeal of this new theory of the firm and its implications for corporate purpose was undoubtedly created by the widely read, practitioner- oriented articles published by Michael Jensen, all of which were backed up by more than 100 scientific papers addressing, one way or another, what he referred to as “the struggle for organizational efficiency.” By the start of the new millennium, Jensen was one of the best-known and influential business economists, even as his work was being challenged by academic colleagues and students who had entirely different conceptions of what role corpora­tions served, and needed to serve, in contemporary society. To many audi­ences, however, Jensen's ideas about the coordination, control, and manage­ment of organizations “made sense.” And, in many respects, they did.

For example, many of Jensen's students and fans in industry were just as concerned as he was about failure of the internal control systems of large, public firms, which was the subject of his 1993 presidential address to the American Finance Association. After analyzing the performance of large public firms from 1980 to 1990 in preparation for this address and its accom­panying paper, Jensen discovered that a large proportion were unable to earn their cost of capital on a sustained basis (due to major inefficiencies in their capital expenditures and research and development spending). From these findings of low investment returns and the widespread destruction of eco­nomic value in large firms (particularly those without monopoly power) dur­ing the 1980s, it seemed straightforward that Jensen's advocacy for aggressive pursuit of shareholder wealth maximization, coupled with compatible gov­ernance reforms, was the proper antidote for the large number of underper­formers. Many in academia and the business community agreed.

In addition, Jensen's concerns about underperforming firms coincided with the development of the market for corporate control, which blossomed in the 1980s, and his arguments in favor of hostile takeovers as a disciplining device for inefficient firms immediately found support from buyout firms, whose widely debated and oft-criticized takeover strategies suddenly found an elegant, academic validation. Starting in the 1980s, almost a quarter of public firms in the US were the target of attempted hostile takeovers op­posed by a firm's management and another quarter received takeover bids supported by management. In this environment, Michael Jensen's rationale for shareholder wealth maximization and equity-based pay (as a way of re­ducing agency costs) was quickly picked up and embraced by buyout firms and takeover specialists seeking economic justification for their supposedly value-creating strategies.

Another source of popularity of this new theory of the firm and expression of corporate purpose was that it offered corporate executives and financial analysts a single, theoretically justifiable performance measure (stock price) that captured the present value of all future effects—namely, firm value. As Jensen famously wrote in 2002:

Any organization must have a single-valued objective as a precursor to pur­poseful or rational behavior.... It is logically impossible to maximize in more than one dimension at the same time.................................................. Thus, telling a manager to

maximize current profits, market share, future growth profits, and anything else one pleases will leave that manager with no way to make a reasoned decision. In effect, it leaves the manager with no objective.⁶

From here, it was an easy step to place firm value and shareholder wealth at the center of corporate conscience.

Finally, the contractual theory of the firm, buttressed by agency theory, was a timely reinforcement of the Friedman doctrine, as described by Nobel Laureate Milton Friedman in Capitalism and Freedom in 1962 and his famous 1970 article in The New York Times that grabbed the attention of the business community and continues to resonate today in many classrooms and board­rooms. Friedman argued that a manager's primary duty is to maximize the value of shareholders' capital because it maximizes the chance of capitalism to allocate capital freely in the service of individual needs, promotes eco­nomic efficiency, preserves individual freedoms, and maintains the trust that shareholders place in managers to serve their interests. At base, this was a normative, ethical argument. In this way, the concept of shareholder wealth maximization was cobranded by two of the leading lights of the Chicago school of economics (where Freidman was a professor and Jensen received his doctorate).

Criticisms of this revisionist conception of the firm and corporate purpose have persisted for many reasons. To start, the well-functioning of market economies and firms requires more than shareholder wealth maximization as a motivating principle, as business school professor Edward Freeman and law school professor Lynn Stout have long argued. To operate functionally, firms need to work hard at building and retaining the mutual trust and confidence of constituencies beyond shareholders. Entrepreneurship, which involves the assembly of complementary resources and skills, cannot be practiced in the absence of cooperation and mutual trust among enterprise members. And apart from entrepreneurial start-ups, shareholders are rarely the sole group providing specialized inputs to corporate production and making essential contributions to an enterprise's success. Executives, rank-and-file employees, creditors, even members of a local community also make essential contribu­tions. For all these reasons, in the absence of cooperation and mutual trust, the costs of coordination and commitment will skyrocket, and the social le­gitimacy of market-based institutions will be under relentless challenge.

Second, the striking metaphor of the firm as a “nexus of contracts” with attendant principal-agent problems that only a focus on shareholder wealth maximization can mitigate is too simple an analogy. Corporations, in their everyday operation, are far more than a “nexus of contracts” through which business transactions are carried out—although associating with a corporate entity through contracts and law to pursue self-interest is certainly part of the creation story. But contracts do not exhaust the reciprocal understand­ing on which the productivity of firms rests. As philosopher Elizabeth An­derson pointed out in her 2015 essay on the business enterprise as an ethical agent, Supracontractual understandings or voluntary reciprocal exchanges with stakeholders are also required for corporations to be successful. For ex­ample, relationships with internal stakeholders (directors, executives, and employees and their unions) comprise the teamwork necessary for produc­tion and the mutual benefits flowing from that production, and in this pro­duction team the contributions of each manager and worker are difficult to observe and ascribe to specific bits of production. Since it is impossible to contractually specify all the ways team members need to cooperate for ef­ficient production, and since excessive monitoring is likely to depress morale and breed “reciprocal distrust,” well-managed firms develop norms or trust and reciprocity among members in return for contractually unguaranteed re­wards such as bonuses, promotions, better working conditions, family leaves, and so forth. For similar reasons, relationships with “external stakeholders” (suppliers, customers, and communities in which the corporation does busi­ness) also require reciprocal understandings beyond contractual guarantees.

On this basis alone, it does not make much sense to view the firm as a nexus of contracts. Rather, it makes more sense to view the firm, in Ander­son's words, as follows:

[It is] a joint enterprise constituted by a nexus of cooperative relationships in which internal stakeholders commit firm-specific assets to relatively long-term team production arrangements, submit to common governance, and repeatedly interact on the basis of norms of trust and reciprocity, all for mutual and reciprocal benefit, the terms of which are not exhausted by law and contract. The firm also typically enters into protracted reciprocal relationships with external stakeholders... which are supported by norma­tive expectations of trust, reciprocity, and mutual gain, not all of which are defined in explicit contracts.⁷

The most important implication of this conception of the firm is that direc­tors owe a fiduciary duty to the corporation itself, not to the shareholders ex­clusively, and that shareholder wealth maximization as a singular definition of corporate purpose is inappropriate.

Third, there are other problems with principal-agent and agency cost the­ories derived from the nexus of contracts conception of the firm. In consider­ing the firm to be an instrument of its owners, who employ agents to operate on their behalf, agency cost theory assumes that these agents (managers) are, to a notable extent, shirkers or disloyal to the firm's principals (shareholders). It is by no means clear, however, that this assumption holds up in real life. Jensen's 1993 study revealing the systematic inability of large public corpora­tions to earn their cost of capital during the 1980s can only imply that agency costs are a driver of his computations of value destruction. There have been very few other attempts to measure agency costs directly, and it is probably impossible to do so because the definition of agency costs lacks the kind of specificity that can be converted into easily measurable, organizational, or behavioral characteristics. So the premise of agency costs, while conceptually plausible, remains to be proved.

Fourth, the shareholder-primacy conception of the firm assumes that all shareholders are alike in their personal goals and values. But can we assume that all retail investors, family offices, mutual funds, pension funds, private equity funds, hedge funds, governments, foundations, and universities, have the same goals? What if some—but not all—institutional investors seek to maximize financial returns for their investors; what if families seek to maxi­mize their “socio-emotional wealth”; what if governments seek to improve social welfare of their citizens? This assumption seems to be an oversim­plification of shareholder and investor motives that both reduces the mea­surement of corporate performance to a single, amoral metric and promotes unbalanced devotion to achieving a goal that can be easily gamed or manipu­lated by management.

Fifth, one of the startling omissions of the shareholder-centric model of the firm pointed out by Joseph Bower and Lynn Paine in a 2017 Harvard Busi­ness Review article is that public company shareholders are not held account­able in any way for the effects of whatever policies they encourage corpora­tions to take. In their words, “shareholders have no legal duty to protect or serve the companies whose shares they own and are shielded by the doc­trine of limited liability from legal responsibility for those companies' debts and misdeeds.” Thus, by elevating the claims of shareholders over those of other important constituencies, “without establishing any corresponding re­sponsibility or accountability on the part of shareholders who exercise those powers,” managers inevitably succumb to increasing pressure “to deliver ever faster and more predictable returns and to curtail riskier investments aimed at meeting future needs and finding creative solutions to the problems fac­ing people around the world.”⁸

Sixth, the new theory of the firm is detached from evolving ideas about the legal status of shareholder claims on the public corporation. It is axiom­atic in the world of capitalism that those who have placed risk capital into an enterprise through their shareholdings deserve a satisfactory return on that capital (the minimum return determined by the riskiness of the investment). It is less axiomatic but nevertheless supported by an array of legal schol­ars, organization theorists, business leaders, and members of the investment community that the interests of other constituencies comprising the firm need to be justly served as well (whatever justly means in case-specific situa­tions) to ensure corporate stability and perpetuity.

Over the years, a variety of legal opinions and legislation have supported this view of corporate purpose. Today, corporate law does not impose on management an exclusive profit-maximizing duty, but merely links direc­tors' and managers' fiduciary responsibilities to the corporation's and stock­holders' long-term interests. While Delaware's corporate statute (directly rel­evant to the 60 percent of publicly traded corporations that are incorporated in the state of Delaware) is not totally precise on the matter of corporate purpose, the state's case law does convey a precise opinion on the matter. For example, after the court affirmed in Revlon, Inc. v. MacAndrews & Forbes Hold­ings, Inc. (1985) that corporate directors must put the interests of sharehold­ers first in the case of takeovers and competitive takeovers bids (by accepting the highest price offered once they decided to put the company up for sale), it clearly left the door open for a more pluralistic conception of corporate purpose if doing so serves the interests of nonshareholders in a way that is rationally related to shareholder interests. This accommodation of plural in­terests is consistent with subsequent court opinions validating the idea that shareholder value does not need to be maximized in the short term in order to achieve corporate success in the long run, such as in the Virtus Capital L.P. v. Eastman Chem. Co. (2014) case. Indeed, what Delaware case law has revealed is a definite preference for corporations focusing on longevity rather than current shareholder wealth maximization.

It is pretty clear that members of the Supreme Court are largely in agree­ment with the Delaware court. AsJustice Samuel Alito noted in Burwell v. Hobby Lobby Stores, Inc. (2014), “While it is certainly true that a central objec­tive of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of every­thing else, and many do not do so.”

For all these pragmatic moral, economic, and legal reasons, one can argue that a more pluralistic vision of capitalism and corporate purpose has sub­stantial merit—as long as managers and directors do not use “stakeholder” reasons to justify strategic decay due to underinvestment in the business and poor company performance. But can a more pluralistic vision of corporate purpose be judged as being more “just” and “efficient” than one rooted in shareholder value creation? Here is where the principle of reciprocity rooted in the insights of Aristotle come into play.

A Time for Reciprocity

In his book Justice: What's the Right Thing to Do, American political philoso­pher Michael Sandel observes that “it is hard to make sense of our moral lives without acknowledging the independent weight of reciprocity.” Sandel's observation helps introduce how reciprocity (and Aristotle's theory of recip­rocal justice) can serve as a sensible guiding principal for definitions of cor­porate purpose that are more attuned to the emerging collective social values of civil society than shareholder wealth maximization.

THE RECIPROCITY PRINCIPLE

According to Aristotle, reciprocity refers to an exemplary kind of social coop­eration in a transactional setting. Reciprocity is a practice by which transact­ing parties preserve parity in the value or utility of the benefits exchanged over time. In Book V of Ethics, Aristotle proposes a theory of exchange be­tween transacting parties that defines the exchange as primarily an ethical problem: the exchange of goods is the material content of social relations between people that can only be sustained as long as it represents an “ex­change of equivalents,” to use the words of philosopher Joseph Soudek in his 1952 essay on Aristotle's theory of exchange. At the societal level, Aristotle argues that in order for the economic basis of society to be secure—with that economic basis being defined by the division of labor and exchange of prod­ucts of specialized labor—every exchange of goods also has to be an exchange of equivalent value between buyers and sellers. In other words, market ex­changes cannot take place on a sustained basis unless the parties to such exchanges are assured that what they give away and what they receive is of equivalent value to each of them. For this to happen, some form ofjustice is required that holds people together, and that form is reciprocal justice, which involves the notion of equivalent or proportional returns between contract­ing parties.

What Aristotle means by this is that if a shoemaker and a housebuilder, to use his example, were to enter into an exchange, what makes such an exchange reciprocal is the value, or personal utility, of the work that is ex­changed, not the specific cost of the individual units produced by the two parties. Accordingly, the more valuable a person's skill (say, the housebuilder) is to that of another person (say, the shoemaker), the greater will be the quantity of products that the first person can justly command from the sec­ond person.

For Aristotle, “wants” or needs for the traded good form the basis of ex­change between parties and serve as a measure of the value of the goods ex­changed. To meet the standard of reciprocal justice, the utility value of the goods exchanged must be proportional to each party's perceived needs and wants. If one party gets richer at the other's expense, there would not be reciprocal justice—because one party would have more than one's due share and the other would suffer the injustice of having less. Similarly, the value of each party's needs and wants can be accurately and fairly established only if the relevant exchange negotiations are free from the domination of one party over another. Where there is no voluntary exchange, there is no reciprocity.

(Money, of course, serves as a useful medium for expressing wants and thus the value of goods exchanged and facilitates exchange by transform­ing subjective, qualitative phenomena like wants and want satisfactions into objective, quantitative ones. This notion of value—the basis of Aristotle's concept of reciprocal justice—is utility-based, not cost-based. In this sense, Aristotle was an originator of the utility theory of value as well as the prin­ciple of reciprocity.)

Although Aristotle was preoccupied with exchanges between individuals and not with exchanges between many buyers and sellers competing with each other in markets of various degrees price transparency, his theory of exchange addresses a universal paradox that exists in all markets: namely, that exchanges of goods take place between nonequivalent parties who de­sire goods or skills that they do not possess; yet in order for the exchange to take place some sort of equivalency needs to be established. As explained by Soudek, the objective of this theory was to find a principle that could “equate” what appears to be “unequal” or inequivalent (by virtue of the different skills required to produce the desired goods).

How can we apply Aristotle's standard of freely negotiated equivalent and proportional returns between contracting parties if one of the parties—let's say shareholders—is seeking supernormal returns? What Aristotle would ar­gue is that if shareholders and their designated decision agents (corporate of­ficers) were to seek above-average corporate returns at the expense of hourly workers whose needs and wants are either unmet or underserved, then there could be no reciprocity. But if shareholders were to seek and achieve super­normal returns while at the same time being open to negotiate free of domi­nation a new or exchange of equivalent utilities based on any related changes in the wants and needs of employees, then it could be possible to meet Aris­totle's standard of reciprocity. In this way, exchanges meeting the standard of reciprocal justice are not subject to any cap on the utilities exchanged.

The fact that voluntary markets are competitively structured in a capital­ist economy and thus are often adversarial in nature raises another impor­tant question: whether any market transaction can be expected to be truly reciprocal or, for that matter, fair. If “fairness” connotes absolute equality in the exchange of benefits, then the answer is no—for the simple reason that it is impossible to precisely estimate and guarantee absolute equality or equiv­alency in value of benefits exchanged. But if fairness is based on subjective, self-interested definitions of needs, wants, and value received from a trans­acting party, then the impossibility of fair, reciprocal transactions melts and the pursuit of individual self-interest can be consistent with just exchanges.

It should now be clear that an important feature of Aristotle's concep­tion of reciprocal exchange is that such an exchange is the result of a bar­gain struck between parties making their own terms of exchange. The par­ties make their own estimates of the want satisfactions that they will derive from the goods or skills they get in exchange for their own goods or skills. In subsequent bargaining or negotiation, parties arrive at an exchange ratio that is an intermediate or mutually determined ratio between the two (pre­bargaining) estimations of want satisfactions. In the absence of domination of one party over another, this exchange ratio establishes each transacting party's “reserve price” for cooperation. And since the context of exchange relationships in business continually change, reciprocity is best understood as a procedural matter, based on dialogue and periodic renegotiations, where new agreements or contract can be forged and an “ex post settling up” (to use Eugene Fama's phrase) can take place if one party has been disadvantaged in the past.

ETHICAL RECIPROCITY

The principle of reciprocity is particularly relevant where exchange relation­ships extend over prolonged or uncertain time periods, and where unantici­pated contingencies cannot be planned for. In contrast to situations where a business exchange takes place over a specified time period (as in spot mar­kets) and contracts can easily state in advance the terms of exchange with specified services and returns, exchanges taking place over multiple time periods and involving conditions and terms that cannot be easily specified in advance call for another kind of reciprocity. Aristotle refers to the latter situation as requiring ethical reciprocity and the former as requiring only legal reciprocity.

The practice of ethical reciprocity requires a different conception of self­interest than that which has been become the bedrock of the economic the­ory of human behavior. The traditional economic conception of self-interest is “a commitment to one's interests without regard for how they affect oth­ers.” This conception reflects a model of economic man (homo economicus) based on an assumption of infinite greed. It also reflects the assumption that in competitive markets, everyone behaves as if they were completely selfish and that there is little interest in “fair” outcomes. We can refer to this form of self-interest as competitive self-interest.

Competitive self-interest typically leads to conflicts in the business world where parties with nonidentical interests need to find a way of working to­gether. In business life, the most common conflicts include those between shareholders and managers and between equity holders who have opera­tional control of the company and creditors who have a first claim on com­pany assets in the case of bankruptcy but little or no operational control. Competitive self-interest also leads to conflicts of interests with a firm's vari­ous constituencies in the pursuit of such winner-take-all strategies as hostile takeovers, aggressive pricing, labor lockouts, cornering commodity markets, and so on, all of which can seriously harm employment, a local community's economy, an industry's supplier base, or even the national interest.

An alternate conception of self-interest, one more consistent with the reciprocity principle, treats “the good of others as part of our own interests” and remains attuned to what others are giving up for the benefit of the com­munity as a whole. Political philosopher Danielle Allen refers to this form of self-interest as ethical self-interest.

Ethical self-interest has direct applicability to the world of business. We rarely serve our best interests by pursuing and promoting our own inter­ests to the exclusion of others' interests. We typically need others to help us achieve our goals, and the longer we are indifferent to the interests of others, the greater the chance that others will act in ways that hinder achievement of our goals. Similarly, our self-interest is often furthered by restraining our­selves from maximizing our own interests, knowing that taking into consid­eration the interests of others will make the social and political context of economic relationships more durable.

Put in other words, ethical reciprocity always requires, as Allen has argued, a certain amount of personal or institutional sacrifice. Sacrifice—namely, the surrender of something valued or desired for the sake of something regarded as having a higher or more pressing claim—is as central to the world of busi­ness as it is to the practice of democracy and democratic citizenship. With respect to democracy, sacrifice involves, for example, accepting defeat after a hard-fought election. In this way, sacrifice builds community and discour­ages violence. Sacrifice in the world of business involves not only completing mutually satisfying economic transactions between self-interested parties but also a willingness to defer personal and corporate gains to maintain the

health of the economic system. Sacrifice in this broader context reflects a sense of responsibility by self-interested economic actors for the economic system as a whole and an understanding of what self-restraints are required so that system can better preserve itself.

Consider, for example, the case of an investment banker being invited to join representatives of major audit firms to discuss with the Financial Ac­counting Standards Board (FASB) accounting new rules pertaining to merger and acquisition transactions—with no other party present representing the general public present. In this case, as elaborated by Rebecca Henderson and Karthik Ramanna, the banker faces two choices: recommending rules that maximize the bank's current economic interests or deferring some private gains by acting as a steward for the system as a whole, in the absence of any public participants. Performing both roles is sometimes referred to as accepting dual agency, and dual agency is often required to manage compet­ing responsibilities. In the FASB rulemaking case, ethical self-interest would require the adoption of a dual agency role by the banker and the possible de­ferral of something of value to bankers in order to advance the perceived le­gitimacy of the financial system and preserve the possibility of private gains over the long run.

ETHICAL RECIPROCITY AND ORGANIZATIONAL EFFICIENCY

Pursuing corporate purpose based on the principle of ethical reciprocity not only meets an Aristotelian standard of justice, but also brings with it access to a major source of organizational efficiency. The foundational writings of Chester Barnard on “cooperative systems” provide the link between the prac­tice of ethical reciprocity and organizational efficiency in market economies.

Barnard spent a 40-year career at AT&T, including as president of New Jer­sey Bell Telephone company, and later served as president of the Rockefeller Foundation. His 1938 book The Functions of the Executive is one of the intel­lectual cornerstones of modern organizational theory. For Barnard, organiza­tional survival and efficiency depend in large part on the distributive process embedded in cooperative systems.

According to Barnard, organizations are best conceived as systems of “cooperative human activities” whose primary functions are the creation, transformation, and exchange of utilities. These functions transcend and embrace such diverse “economies” as those encompassing the assembly of physical assets useful to the organization; the maintenance of relationships between the organization and other organizations and individuals not con­nected with the organization; and management of the changing balance be-

Corporate Purpose in a Post-Covid World 227 tween individual work and the material and social satisfactions received in exchange for this work.

In each of these economies, exchange relationships can either be recip­rocal or exploitive, efficient or inefficient. Such relationships are efficient, according to Barnard, when the distributive process creates “a surplus of satisfaction” for each participant in the cooperative system and for the co­operative system as a whole. If each participant in a cooperative system gets back only what is put in and receives no surplus of satisfactions, then this cooperative system is inefficient because a balance between burdens and sat­isfactions does not exist. In other words, efficiency for both the participant and the system is that of satisfactory exchange.

An important precondition of efficient exchange is the generation of some kind of surplus or slack that can be put on the table and traded in a way that the eventual returns to all contracting parties are mutually satisfying. This may require some degree of sacrifice in order to achieve the surplus of satisfactions that can then be efficiently distributed. In the absence of such surplus to be traded away, there will be individual or group defections (in­cluding shirking of responsibilities) from the cooperative efforts, which in turn will threaten the continuance of that organization. While there can be no precise measurement of Barnard's efficient exchanges, the most telling indicator of the efficiency of an organization is in terms of its persistence or decline and failure.

Since cooperative systems need to be continually adaptive to changing conditions, a key executive function is to ensure that the bases of coopera­tion (exchanges) continually readjust as necessary to retain the structural integrity of the organization. This is very different perspective on executive leadership than shareholder wealth maximization. It is an essential execu­tive function for firms pursuing ethical reciprocity as a guide to corporate purpose.

CAN ETHICAL RECIPROCITY SURVIVE SHAREHOLDER WEALTH-MAXIMIZING COMPETITION?

Can firms anchoring expressions of corporate purpose in the principle of reciprocal justice avoid being destroyed by aggressive wealth-maximizing competitors?

The answer to this question is yes, as long as a critical condition is satis­fied. Ruthless wealth maximizers will always win, and reciprocity practition­ers and society will always lose unless firms practicing reciprocity manage to sustain sufficient returns to attract and reinvest resources in the business

at a rate comparable to that of wealth maximizers. This condition can only be satisfied when reciprocity practitioners continue to work for the creation of real long-term economic value while at the same time integrating the principles of ethical reciprocity into their business. This dual effort is a core commitment required to successfully rehabilitate corporate purpose and governance.

What does it take to make this happen? Part of the answer lies in what it has always taken to achieve competitive advantage: an ability to work smarter, faster, and harder than one's competitors in building sufficient product or service differentiation to command appealing prices in the mar­ketplace and driving down costs at each stage of the value-added chain to ensure attractive operating margins and profit growth. As long as firms can earn their cost of capital and grow at or above the average growth rate of their competitors, they will be able to retain and attract sufficient capital to reinvest in the competitiveness of the business, while putting themselves in a strong position to generate a sufficient surplus of satisfactions for a firm's participants to cement their willingness to cooperate in the life of the enter­prise (that is, to meet their reserve price for continued cooperation).

A second part of the answer lies in recognizing that achieving such eco­nomic performance through reciprocal exchanges rather than the extraction of value from other participants in the enterprise requires a solid understand­ing of the long-term economic value that voluntary reciprocal exchanges bring to the enterprise: how employment relationships based on reciproc­ity rather than the extraction of value benefit the enterprise over the long term (the rate of employee turnover can be a leading indicator of reciprocal employee relationships); how paying the full costs of environmental damage and repair improves the company's long-term strategic and financial posi­tion (unacknowledged and unfunded environmental liabilities can affect, for example, the availability of bank credit); and how attention to the full range of social issues facing a business can have a positive economic impact on the enterprise over time. Without such explicit understandings, it will be impos­sible to explain either internally or externally how a commitment to recipro­cal exchange can improve long-term competitiveness and survivability.

There is of course nothing easy about meeting this test of survivorship. Rehabilitating corporate purpose and American-style capitalism is not for sluggards. There are embedded ideological barriers to cooperation that need to be overcome—such as managerial resistance to sharing decision rights with employees over the conditions of their employment or with the general public over how best to minimize environmental degradation and reverse damage to the environment that has already been done.

But, in contrast to popular understanding, there is also nothing in this approach suggesting that shareholders need to accept uneconomic returns in the pursuit of ethical reciprocity, as long as the sources of long-term com­petitiveness are in place and paid attention to. To the contrary: a review by McKinsey & Company of more than 2,000 empirical studies on the impact of corporate attention to ESG concerns on equity returns shows that such at­tention has an overwhelmingly positive effect on equity returns. Similarly, in a 2018 paper, George Serafeim reports that companies scoring better on envi­ronmental and social factors tracked by the Sustainability Accounting Stan­dards Board (SASB) tend to trade at a premium relative to their more socially detached and uncommitted peers. What appears to be driving these early re­sults is the combination of minimizing or eliminating future environmental and social liabilities and greater management discipline in driving revenue growth, reducing costs such as energy consumption, increasing productivity through greater employee motivation, and avoiding the trap of investing in “energy hungry” assets requiring premature write-downs. Echoing this aca­demic research is a 2019 survey of 200 CEOs and CFOs of companies in the S&P 1500 Index by the Rock Center for Corporate Governance at Stanford University showing that “only 12 percent believe that addressing stakeholder interests requires a short-term cost in order to generate long-term value.”

Fostering Change in Corporate Purpose

It would be a big step forward in the post-Covid world if CEOs and their boards of directors instantaneously saw the benefit of integrating ethical reciprocity into their expressions of corporate purpose and resulting corpo­rate governance practices. But it took decades for shareholder wealth maxi­mization to become the default purpose of most public corporations, and it will take years before there is a major course correction by public companies, one that embraces some version of ethical reciprocity as a principled guide to corporate purpose. Shifting management mindsets away from emphasizing domination of markets, competitors, suppliers, and employees in the quest for above-average returns toward the mutual interests of all constituencies comprising the firm is a huge break from established ideological and moral conceptions. Under our current version of market capitalism, it is reasonable to expect that public companies will hesitate to take the giant step of replac­ing the principle of shareholder wealth maximization with the principle of ethical reciprocity unless there are good business reasons for doing so.

In the case of distressed firms like US automakers responding to the intense competition from Japanese automakers in the 1970s and 1980s— and others in the textile industry, clothing, semiconductors, telecommu­nications, and health care businesses, all of which also faced similar eco­nomic dislocations in the 1980s—ensuring survival creates strong incentives to forge more cooperative and less “maximizing” labor-management and business-government relationships.

For less economically troubled enterprises, however, the incentives and pressures to change will need to come from other sources. The most powerful sources of influence today are large asset holders and asset managers, who have enormous power and influence over the conduct of public companies. All told, large asset managers now own about 80 percent of US companies' stock through passive and actively managed investment funds. If encour­aged and unleashed by their beneficiaries, the power of institutional inves­tors to engage with current and prospective portfolio companies over their espoused purposes and resulting governance practices is incontestable.

There is evidence that the power source of large asset managers is begin­ning to be mobilized. Starting with the public letter from chairman Larry Fink of BlackRock (a global asset manager with over $7 trillion under man­agement) to CEOs in January 2018 and followed by the highly publicized statement on corporate purpose by the Business Roundtable in August 2019, the message is out that large asset managers and CEOs of large US corpora­tions are now recognizing that society is demanding that companies make a positive contribution to society as well as delivering financial performance. In the words of Larry Fink, “Companies must benefit all their stakehold­ers, including shareholders, employees, customers, and the communities in which they operate.”

Although disparaged in some quarters for being a public relations exercise without any enforcement mechanisms, Fink's CEO letter and the Business Roundtable statement do not stand alone in calling for more attention to the social purposes and obligations of public corporations. They have lots of company from other asset managers who, reflecting the objectives of their clients, already take socially related issues into account in constructing their investment funds. For example, the Global Sustainable Investment Alli­ance found that in 2020, 36 percent of all professionally managed assets—or $35 trillion—were so-called sustainable assets, meaning that these assets were selected according to their environmental, social and governance per­formance. This is strong, suggestive evidence that many large asset manag­ers in addition to BlackRock—such as Vanguard, State Street Global Inves­tors, and Fidelity International, who collectively have another $10 trillion of assets under collective management—are assembling considerable market

Corporate Purpose in a Post-Covid World 231 power aimed at influencing the goals and conduct of current and prospective portfolio companies.

If asset managers with tens of trillions of dollars under management con­tinue to be encouraged by their clients to engage with portfolio companies on matters related to corporate purpose and environmental, social, and gover­nance concerns, they will have at their disposal several ways of making their influence on operating companies manifest. One long-standing strategy is simply to walk away from “bad ESG companies” by selling shares, thereby punishing them with low share prices (and, conversely, rewarding good ESG companies with increasing share prices). This option, colloquially known as “the Wall Street Walk,” is becoming less effective for many large asset man­agers with funds that choose to mimic market indices with index funds and other passive management funds. Since passive management funds—by far the fastest growing investment vehicles today accounting for 45 percent of all assets held by US stock-based funds—must own all the shares in the relevant market index, they have a built-in limit on their exit or walk-away options.

This leaves both passive and actively managed investment funds with four “voice” options for influencing the priorities and practices of portfolio companies: (a) submitting shareholder proposals to shareholders' meetings; (b) voting proxies; (c) screening companies for portfolio inclusion or exclu­sion according to ESG criteria; and (d) engaging face-to-face with companies in closed-door discussions and negotiations around material environmental, social, and governance matters.

The first two of these options have been available for many years. How­ever, most shareholder proposals and proxy votes tend to focus on general issues of corporate governance—such as capital structure, takeover defenses, auditing, board composition, workplace practices, and the reporting of exec­utive compensation and climate risk—rather than on detailed, firm-specific problems of environmental degradation (as in oil and chemicals) or em­ployee safety (as in mining and minerals).

The next two options—the “screening” of companies according to ESG standards for potential inclusion and exclusion in investment portfolios and “active engagement” with portfolio companies on ESG matters—offer large asset managers a greater opportunity to move beyond generic governance issues and exert influence on company-specific matters. In practice, the level of influence exerted by asset managers pursuing these voice strategies de­pends on overcoming built-in information problems.

A 2019 study by Sakis Kotsantonis and George Serafeim shows that asset

managers that screen potential investments for either exclusion or inclusion in their portfolios based on ESG performance data disclosed by companies can easily be misled by both large variations in reporting on ESG by oper­ating companies (roughly 80 percent of S&P 500 companies currently dis­cuss ESG issues in some way in their annual shareholder reports) and wildly divergent assessments of companies' performance by those producing ESG scores for sale to asset managers. In response to this problem, there has been a series of concerted efforts in recent years to pressure the Securities and Ex­change Commission (SEC) to adopt mandatory disclosure requirements for certain ESG matters—the latest being a petition for rulemaking submitted in October 2018 by law professors Cynthia Williams of York University and Jill Fisch of the University of Pennsylvania, together with numerous institu­tional investors that collectively manage more than $5 trillion in assets. As of this writing, it is unclear whether or how the SEC will act on this petition, but the agency has sent letters to investment companies asking what they determine socially responsible investments to be.

A smaller group of asset managers have chosen to focus on active engage­ment through ongoing, face-to-face dialogue with corporate managements on stakeholder and ESG matters to help decide what companies to include and retain in their investment portfolios. A notable example of this active engagement approach is Fidelity International, Ltd. (FIL), which has invested heavily in training its own equity and fixed-income research staff to assess for themselves the ESG performance of each and every company in their portfolios (a total of 3,000 companies) and conduct detailed sustainability discussions with corporate managements on a recurring basis (in 16,000 meetings a year).

FIL has been willing to investment heavily in its own proprietary sustain­ability rating system and “active engagement” with portfolio companies on the belief that sustainable investing leads to higher investor returns. FIL's en­gagement strategy also reflects a desire to better align its fund management with the surging interest of their end investors on ESG matters. (Industry­wide, financial assets under professional management are reportedly moving to ESG strategies at a 20 percent annual growth rate.)

There is emerging evidence that the investment thesis of FIL and other similarly committed asset managers has merit. I have already cited studies by George Serafeim and colleagues revealing that the adoption of “sustainabil­ity practices” requiring commitments to nonfinancial objectives and non­shareholding participants in an enterprise can be associated with superior financial performance. Morningstar and Fidelity's website also report that 54 percent of ESG funds were in the top two performance quartiles in 2017.

As a minimum, a 2015 Morgan Stanley study reports that the performance of institutionally-managed ESG funds in recent years have at least been on a par with traditional investment. Finally, using its own proprietary ratings, FIL carried out a performance comparison across more than 2,600 companies during the extreme bear market from February to March 2020. FIL found eq­uity and fixed income securities issued by companies at the top of their ESG scale outperformed those with average and weaker ratings in this short pe­riod. On average, each of FIL's five ESG rating levels was worth 2.8 percentage points of stock performance during that short period of volatility.

Although it is still to be determined how much alpha (or returns in excess of overall market return or some other benchmark return) can be achieved over a longer time period by asset managers pursuing sustainable invest­ment strategies, asset managers are definitely in a position to provide an ever-stronger impetus for public companies to embrace the principle of ethi­cal reciprocity as a guideline for their espoused purpose and temper their extreme focus of portfolio companies on shareholder value maximization.

Preconditions for Durable Change

With tailwinds gathering behind the idea that corporations have some kind of direct obligation for their nonshareholding stakeholders, it is likely that corporate boards will be increasingly called on by large asset managers to integrate the reciprocal justice principle (or something akin to it) into their expressions of corporate purpose and management practices. For such decla­rations to be meaningful, certain preconditions for successful implementa­tion need to be in place.

The first precondition is unequivocal board commitment to fairness and reciprocity as governing principles. Without such an unambiguous commit­ment in both internal and public communications, signaling a major shift from an ideology of shareholder self-maximization to collective value cre­ation and fair exchanges of value, no change in corporate purpose and behav­ior is possible—not the least because the values underlying the measurement and reward of senior executives will remain unchanged, as will the choices they make.

This leads to the second precondition—the elimination of perverse finan­cial incentives for senior executives emanating from the shareholder wealth maximization ideology. Financial incentives pegged principally to share­holder value metrics inevitably crowd out many other performance indica­tors. Without a decoupling or distancing of executive compensation from current measures of shareholder wealth, there can be no incentive to bal­ance the conflicting interests of various groups participating, voluntarily or not, in the life of the enterprise. Indeed, incentives to claim value from these groups, rather than to exchange value, will remain intense, and executives will remain corseted in the economic straightjacket of absolute shareholder primacy. Asset managers will therefore look for evidence that firm-specific performance metrics beyond shareholder value have been integrated into a company's performance measurement system; that the time horizon of these performance measures have been stretched out beyond the annual finan­cial reporting cycle; and that the holding period for all stock options and grants before they can be exercised or sold are similarly extended, reflecting the natural strategy cycle of the firm rather than quarterly or annual share price performance. Finally, asset managers will closely examine the extent to which directors and senior executives hold significant ownership stakes in their companies so that they will financially be liable for any costly break­downs in corporate reciprocity and other foundational features of long-term sustainability.

A third precondition is active monitoring of conformance with espoused principles of fairness and reciprocity. Some asset managers have invested heavily in their own, proprietary methodologies for monitoring the sustain­ability of portfolio companies. But the most promising reciprocity practitio­ners will have also developed their own ways of monitoring and reporting on their espoused commitments to stakeholders. In an ethical reciprocity regime, many of the relevant performance measures will necessarily be quali­tative (i.e., survey-based); some, however, may be amenable to quantitative reduction, based on indicators of time, costs, or value. In order to survive as a governance tool, whatever performance indicators emerge from this process will need to reflect an understanding of how reciprocity can be economically valuable for all parties. With respect to social and environmental perfor­mance metrics, two places to look for the latest thinking about measuring a company's social and environmental impacts include the SASB's Materiality Map (developed by the Sustainability Accounting Standards Board) and the work of professor George Serafeim and colleagues at the Harvard Business School on the Impact-Weighted Accounts Initiative, which aims to create fi­nancial accounts that reflect a company's financial, social, and environmen­tal performance.

A fourth critical precondition is enabling stakeholder voice. This involves creating ways for key stakeholders and constituencies to voice their interests in corporate decisions that affect their separate (and overlapping) interests. In the post-pandemic world, this will be especially important with respect to employees whose economic insecurity and income inequality has been viv­idly exposed by the Covid-19 crisis. The precondition of employee voice is the most radical departure from a shareholder value maximization regime. In both the US and the UK, there is a revitalized political discussion about including employees on corporate boards of directors (even for unionized firms) as a way of guaranteeing employee voice in corporate matters. There are many reasons for questioning the practical implementation of these proposals, starting with the daunting task of re-legislating and perhaps re­litigating corporate governance regimes, which would tie up corporate gov­ernance for decades. Such a restructuring of board composition also runs the risk of narrowing a collective view of where the corporation should be head­ing and perpetuating a focus on short-term gains for nonshareholders rather than longer-term returns from risky investments in the business. This does not mean that there are not better ways to gain critical knowledge and deci­sion input from employees. Indeed, the range of possible voice-participation and decision-influence is wide: in addition to reciprocal union-management dialogue and negotiation, where it exists, there are many examples of em­ployee advisory committees (many universities), employee engagement committees (auto industry), and labor advisory committees (Office of the Trade Representative) to learn from and build on.

Increasing engagement between large asset managers and public companies over matters of corporate purpose—and derivative corporate governance practices—is a hugely important development. For this engagement to have the greatest chance of narrowing the gulf between what markets value and what people value, “sustainable investors” know that mere exhortations to balance shareholder interests against other parties' interests in defining and implementing corporate purpose is insufficient. What asset managers and corporate managers committed to sustainable investing are groping for, each in their own way, is a practical alternative to reliance on shareholder wealth maximization as the sole principle underpinning public corporations' ex­pressions of corporate purpose. I suggest in this essay an alternate principle based on the age-old concept of reciprocaljustice. In the absence of such moral principle, balancing the oft-conflicting interests of corporate stake­holders will likely continue to reflect personal preference, partiality, and im­provisation untethered to any guiding principle at all, thereby perpetuating a pattern of unaccountable capitalism and an increasingly troublesome gulf between what markets value and what people value. This would be a politi­cally and economically unsustainable outcome.

Notes

1. Mark Carney, “The World after Covid-19," The Economist, April 18, 2020.

2. "Corporate purpose" refers to how businesses organized as corporations define their primary obligations and responsibilities, in contrast to the goals and objectives involved in managing specific businesses on a day-to-day basis.

3. In addition to my rebuttal of this doctrine, other recent critiques include Joseph L. Bower, Herman B. Leonard, and Lynn S. Paine, Capitalism At Risk­Rethinking the Role ofBusiness (HBS Press, 2011 and 2020); Lynn Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corpo­rations, and the Public Interest (Berrett-Koehler, 2012); Joseph L. Bower and Lynn S. Paine, "The Error at the Heart of Corporate Leadership," Harvard Business Review, May-June 2017, 51-60; Colin Mayer, Prosperity: Better Business Makes the Greater Good (Oxford, 2018); Rebecca Henderson, Reimagining Capi­talism in a World on Fire (Public Affairs, 2020).

4. As we will see, ethical reciprocity (and reciprocal exchange) is not to be confused with the concept of shared value creation (see Michael E. Porter and Mark R. Kramer, "Creating Shared Value," Harvard Business Review, January- February 2011, 62-77), which is rooted in the belief that corporations can meet social needs within a shareholder wealth maximization regime by focusing on the improvement of their competitive advantages through bet­ter serving existing markets or lowering costs or improving product quality through innovation. Economic value can certainly be shared after it has been created if approved by shareholders, and concessions to shareholder value can be avoided by highly competitive firms harvesting supernormal returns. But this is a very different process from that of practicing ethical reciprocity, which recognizes (a) that the interests of a firm's constituencies are not always mutual and, indeed, are rarely presented as such and (b) that these conflicting interests can be reconciled only by value exchanges honor­ing the reserve price of continued support and participation in the life of the firm. The practice of ethical reciprocity starts with a front-end bargain with constituencies; shared value creation is an after-the-fact distribution of benefits at the discretion of shareholders and their agents (comprising the board of directors).

5. Michael C. Jensen and William H. Meckling, "Theory of the Firm: Manage­rial Behavior, Agency Costs and Ownership Structure," Journal of Financial Economics 3, no. 4 (October 1976): 310-11.

6. Michael C. Jensen, "Value Maximization, Stakeholder Theory, and the Corpo­rate Objective Function," Business Ethics Quarterly 12, no. 2 (April 2002): 237-38.

7. Elizabeth Anderson, "The Business Enterprise as an Ethical Agent," Perfor­mance and Progress: Essays on Capitalism, Business, and Society (Oxford Scholar­ship Online, September 2015), 189-190, 191.

8. Joseph L. Bower and Lynn S. Paine, "The Error at the Heart of Corporate Leadership," Harvard Business Review, May-June 2017, 52.

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