Abstract:
This Article explores the legal manifestation of the interaction
between the general public and the public corporation. Revisiting
team production analysis, this Article redefines the corporate team
and argues that while several constituencies indeed form part of the
corporate team, others are exogenous to the corporate enterprise.
Employees, suppliers and financiers contribute together to the
common corporate enterprise, enjoying a long-term relational
contract with the corporation, while retail consumers contract with
the corporation at arm’s length, and other people living alongside the
corporation do not contract with it at all. Under this organizational
model, the general public may participate in the team forming the
corporate enterprise by providing public financing. Indeed, corporate
law was developed to protect public investors.
However, evidence shows that most of the listed equity is no longer
held by the general public directly; the new shareholders are
institutional investors. This Article analyzes the impact of
institutionalization on the interaction of corporations with the
general public, outlining spheres of potential divergence between
institutional and retail investors and raising the timely concern for
the agency costs embedded in the relationship between the general
public and institutional investors. First, not all institutional investors
are investing on behalf of the public. Shareholder empowerment
platforms are frequently mobilized by intermediaries representing
only the wealthiest 1%. Second, when shareholders are mostly
institutional investors, the likelihood of distributional conflicts
between various stakeholder groups is higher because the
institutional thought and decision-making patterns do not match
those of the general public. The objectives of institutional investors
are significantly narrower than, and potentially divergent from, those
of the general public. Third, the technology used for trading by
institutional investors, algorithmic trading, potentially imposes
externalities on retail investors, and ultimately widens the gap
between corporations and the general public. It may often be the case
that the institutional interests align with those of the general public,
but the law does not necessitate it.
This Article further discusses converse trends towards convergence,
including socially responsible investments and impact investments,
corporate social responsibility, sustainability reporting, and customer
voice. This Article ultimately suggests policy implications. When
shareholders’ interests are not necessarily aligned with those of the
general public, we have reason to revisit the axiom of shareholder
value as the underlying purpose of corporations, the boundaries of
fiduciary duty, and the limited platform and audience for
sustainability reporting.
[pdf=embedder url=”https://news.law.fordham.edu/jcfl/wp-content/uploads/sites/5/2016/02/Shlomit-FINAL-1-22-16-v.pdf”]
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