Why Isn't Every Corporation in America Accountable to People and the Planet?

To understand where we are today, we first need to understand one word that gets used all the time but rarely gets explained, shareholder primacy.

A shareholder is simply someone who owns part of a company.

If you own stock in Apple through your retirement account, you're a shareholder.

If you started a small business and own 100% of it, you're also a shareholder.

Shareholders invest their money into a business with the exception that, over time, the company will create value.

That value may come through dividends, which are portions of a company's profit paid directly to shareholders or through an increase in the value of the company itself.

Without shareholders and investors, many businesses would never get off the ground.

They provide the capital that allows companies to hire employees, develop products, build factories, conduct research, and grow.

So when people say corporations should create value for shareholders, that's not a controversial statement.

The real question is whether shareholders are the only people a corporation should consider.

That brings us to another word, stakeholder.

A stakeholder is anyone who is affected by a company's decisions.

Stakeholders can be employees, customers, suppliers, communities, governments.

The environment can be thought of as a stakeholder because corporate decisions affect natural resources that everyone depends on.

And yes, shareholders are stakeholders too.

The difference is that shareholder-focused thinking asks one primary question.

How does this decision affect the owners or owners like me? Stakeholder thinking is a broader question.

How does this decision affect everyone who has a stake in this business, including the environment? Neither framework says profits don't matter.

The debate isn't about whether profits should be the only measure of success.

That debate became especially influential during the 20th century.

One case that frequently comes up is Dodge versus Ford Motor Company, decided by the Michigan Supreme Court in 1919.

Henry Ford had become one of the richest and most successful industrialists in the world.

Instead of paying higher, larger dividends to shareholders, Ford wanted to reinvest more of the company's profits into expanding production, lowering the price of automobiles, and increasing wages for workers.

Some shareholders, including the Dodge brothers, wanted larger dividend payments instead.

The court ultimately required Ford to distribute a special dividend, and in its opinion stated that a business corporation is organized primarily for the profit of its shareholders.