Corporate Value(s)

Values have always been a part of corporate operations, but they are particularly salient today. Corporate values now weigh heavily in consumer, employee, and shareholder choices, so much so that misaligned values can make or break companies. Some argue that managers should select values that align with those of their stakeholders. Others argue that corporate values should match shareholder preferences. Still others claim that economic value, without regard to values, should be the sole focus of managerial efforts. The debate over values is not only important for the theory and practice of corporate governance, but also carries significant policy implications, as Congress and the Securities and Exchange Commission (SEC) are poised to deconstruct the shareholder proposal mechanism—a key source of corporate values formation—based on a limited appreciation of the role of values in corporate operations.

In this Article, we set out to align those who highlight the importance of values with those who maintain that a corporation’s proper role is to focus on value. We argue that managers should select the corporate values that maximize long-term economic value. To do so, however, managers need to understand the economic significance of corporate values. Understanding the values of corporate stakeholders is a key input in that assessment. It is relatively easy for most stakeholders—consumers, employees and even the government—to communicate their values to corporations. Consumers, for instance, do so through their purchasing decisions and, in more extreme cases, boycotts. Employees choose jobs based on values and communicate their preferences to management through internal channels. Shareholders, however, lack ready ways to communicate their values, disadvantaging them relative to other stakeholders, and leaving managers with an information gap that can lead to costly mistakes.

We leverage the foregoing analysis to advocate against two potentially transformative trends in shareholder democracy—the pressure on the shareholder proposal rule and the adoption of voting choice programs. First, the power of public company shareholders to introduce shareholder proposals, many of which deal with values-related issues, has inspired a powerful backlash. Congress is considering repeal of the shareholder proposal rule, and the Chairman of the SEC has expressed frustrated with environmental, social and governance (ESG)-related proposals and backed a controversial proposition that precatory proposals are illegal under state law. Our analysis shows that repealing the shareholder proposal rule or banning values-based proposals would be a mistake in that precatory proposals provide a focused and transparent mechanism for management to learn about what their shareholders value (and what they consider unimportant) without interfering with board discretion. Instead of a ban, we recommend tailored modifications to the rule to address the concerns about misuse that have given rise to its condemnation.

Second, in response to political pressure and criticisms of their stewardship activities, the Big Three mutual funds (Vanguard, BlackRock, and State Street) have implemented voting choice programs, whereby they delegate voting decisions for their portfolio companies to their mutual fund customers by allowing them to select from a curated menu of voting policies. We argue that this approach is flawed. Rather, financial intermediaries should retain their voting power but inform their voting decisions by actively soliciting input from their customers about their values and views. Intermediary stewardship is a more effective way to convey shareholder values to management as long as it is informed by the views of funds’ economic owners.