As you know, the shareholder primacy theory is widely attributed to the Chicago school of economists, beginning in the 1970s, with economist Milton Friedman famously arguing that the only "social responsibility of business is to increase its profits." Subsequently, two other economists published a paper characterizing shareholders as "'principals' who hired executives and board members as 'agents.' In other words, when you are an executive or corporate director, you work for the shareholders." The idea, in effect, is that, as owners, shareholders may legitimately require that the company conduct its business in accordance with their desires. Of course, this idea has been subject to criticism by many as improperly ignoring the interests of other stakeholders, such as employees, customers and the community—so-called "stakeholder capitalism." Under Friedman's version of shareholder primacy, the desire of shareholders has long been presumed to be to maximize value and increase profits. But is it? The author of this article in Fortune makes the argument that the ongoing Exxon litigation against Arjuna and Follow This, two proponents of a climate-related shareholder proposal, throws into sharp relief a schism that has formed among adherents to the idea of shareholder primacy. The question posed is "what do shareholders really want, and are companies ever allowed to ignore them? Arjuna and Follow This own Exxon stock and are trying to dictate how the energy giant behaves. However, they are demanding more than dividends: They want Exxon to commit to more ambitious emissions reductions, and to some, that's just as bad as companies admitting an obligation to workers or the community." Does shareholder primacy necessarily mean just maximizing profits?


The concept of shareholder primacy has not always held sway. Some academics have maintained that, during the booming economy of the decades after World War II, the interests of companies and a broad range of constituencies were in sync. During that period, many companies acknowledged their responsibilities to balance profits and the interests of employees and the community. (Seethis PubCo post.) And, after the 2008 financial crisis, in some corners, the fastidious devotion to maximizing shareholder value had worn a bit thin, and the competing concept of stakeholder capitalism developed. For example, in 2019, the Business Roundtable announced the adoption of a newStatement on the Purpose of a Corporation, signed by 181 well-known, high-powered CEOs, that moved "away from shareholder primacy" as a guiding principle and outlined in its place a "modern standard for corporate responsibility" that makes a commitment to all stakeholders.(See this PubCo post. See also, this PubCo post,this PubCo post, this Cooley News Brief, this Cooley News Brief, andthis Cooley News Brief.) Of course, that was before ESG backlash. (See, e.g., this PubCo post and this PubCo post.)

Last month, you may remember, ExxonMobil filed a lawsuit against Arjuna Capital, LLC and Follow This, two proponents of a climate-related shareholder proposal submitted to Exxon. The proposal asked Exxon to accelerate the reduction of GHG emissions in the medium term and to disclose new plans, targets and timetables for these reductions. Instead of following the standard SEC no-action process for exclusion of shareholder proposals, Exxon filed a complaint against the two proponents seeking a declaratory judgment that it could exclude their proposal from its 2024 annual meeting proxy statement. The CEO of Exxon claimed that the proponents "aren't true investors." They're activists masquerading as investors, he said, using the "Goldilocks Trojan Horse strategy" to bring proposals to the company that aren't in the best interests of the company or its shareholders. The two proponents promptly notified Exxon that they had withdrawn their proposal. They expected Exxon to withdraw the complaint; according to the founder of Follow This, "[n]ow that we have withdrawn, the company has no reason to continue the lawsuit." Instead, Exxon said that it would continue the lawsuit; in a status update filed pursuant to the Court's Order, Exxon contended that there was still a live controversy and asked the Court to settle the legality of the proposal. (See this PubCo post and this PubCo post.) Arjuna and Follow This have now each filed motions to dismiss for lack of subject matter and personal jurisdiction, arguing that the issue is moot because they have withdrawn the proposal and agreed not to resubmit it.


In their motions, Arjuna and Follow This further contend that, in pursuing the litigation, "Exxon has laid bare its true intention—to challenge how the SEC interprets and applies its own proxy proposal rules, without actually confronting the SEC itself. Exxon may prefer litigating against parties like Arjuna and Follow This—who have fewer resources and whom Exxon can unfairly malign in its Complaint—over seeking a routine 'no-action' letter from the SEC. Nevertheless, because there is no actual case or controversy, there is no Article III standing and the Court must dismiss the Complaint for lack of subject matter jurisdiction."

In its complaint, Exxon argues that the proposal from Arjuna and Follow This is not designed to improve Exxon's economic performance or create shareholder value; rather, they want to "interfere with ExxonMobil's business and to promote their own interests over those of ExxonMobil's shareholders." Exxon's CEO told CNBC in an interview that the proponents "aren't true investors." They're activists masquerading as investors, he said, using other people's shares to bring proposals to the company that aren't in the best interests of the company or its shareholders. In other words, they aren't trying to maximize profits as expected under the traditional concept of shareholder primacy.

Now Exxon has begun to face some pushback. As reported in the FT, a senior director at Ceres said that "[w]hat Exxon is trying to do here is to really try to fundamentally shift the balance of corporate power between corporations and their investors by making investors think twice about exercising their rights to file a shareholder proposal." And the reaction to the litigation is not just from nonprofits. While Arjuna and Follow This hold very small numbers of shares, one of Exxon's top ten shareholders, which holds a 1.4% stake worth $5.4 billion as of the end of 2023, has also expressed concerns about the litigation. The CEO of Norway's $1.5 trillion oil fund, the world's largest sovereign wealth fund, told the FT that it's "a worrisome development. We think it's very aggressive and we are concerned about the implications for shareholders rights." According to the FT, the "decision by the biggest western oil company to persist with what is likely to be an expensive legal case has provoked concern in the investor community that it will discourage small investors filing similar petitions in the future. The Norwegian fund is increasingly active on climate issues and has backed shareholder resolutions on the environment at several oil and gas groups. It also filed its own proposals for the first time last year at four companies....The Norwegian oil fund voted in favor of a proposal at Exxon's annual meeting last May to adopt a medium-term greenhouse gas reduction plan." [Corrected for U.S. spelling.]

According to the author of the Fortune article, the Exxon litigation—along with the backlash against ESG investing—"shows that some of the support for shareholder primacy is highly contingent—it is better described as profit primacy." He asserts that there is now a third perspective that has become increasingly influential, an alternative to "profit primacy" and stakeholder capitalism. This third perspective agrees that "shareholders are in charge, but that they naturally have a mix of goals, of which profit is only one. Linking to a Matt Levine column, the author observes that "[i]nvestors are, after all, people, too."


In his column, Levine offers this illustration:

"We know that shareholders are mortal humans who live on Earth.If an asteroid was heading to destroy the Earth, and a public company could divert the asteroid at the cost of reducing its earnings per share by $0.02 this quarter, probably it should divert the asteroid? Probably the shareholders would approve? Even though it lowered the stock price? A lot of environmental investing is premised on similar ideas: It might be good for profits, but bad for the future livability of the Earth, for a company to emit a lot of carbon. Shareholdersquashareholders should prefer that the company emit the carbon and increase profits, but shareholdersquahumans would prefer a livable planet. At least some shareholders explicitly tell companies that they prefer the good environmental outcome over the good profits outcome (that is, they vote as humans rather than as profit maximizers), andat least some corporate managers seem to take this preference into account....

"But the general form of this is:

  • The company has shareholders,
  • Those shareholders (or a lot of them anyway) have some identifiable (or at least plausible) preferences other than maximizing the stock price, and
  • The company's executives should (or could, or might want to, or might be incentivized to) optimize those preferences, and sometimes prioritize them ahead of maximizing profits or the stock price.

"I should say that this idea is controversial, both in its specific forms (environmental, social and governance investing is wildly controversial, and nobody believes the index-funds-hurt-competition stuff) and in general. The objection to the general form is something like: Sure, right, shareholders are humans and have other interests, but they have other mechanisms to take care of those interests. They can vote for the government to do environmental regulation, etc.; the only thing that they have in common as shareholders of Company X is their ownership of Company X shares, so Company X's executives should focus on that."

In the Fortune article, the author argues, in essence, that shareholders have multiple objectives, and their preferences are "a matter of degree, not a binary." Other academics, he points out, have agreed that shareholders do come first, "but that it's their overall welfare that companies must maximize, not just profits." And, in this paper from the National Bureau of Economic Research, What Do Shareholders Want? Consumer Welfare and the Objective of the Firm, cited by both Fortune and Levine, a study showed that shareholders are not interested solely in profit maximalization; they also have an interest in consumer welfare:

"Shareholders want a firm's objective function to place some weight on consumer welfare, motivated by both self-interested and altruistic motivations. Firms have a unique technology for improving consumer welfare: lowering inefficient price markups, which increases consumer welfare more than it lowers profits. Optimal pricing formulas can be adapted to account for shareholders' marginal rate of substitution between profits and consumer welfare. Calibrations from preference parameters show many shareholders should place non-trivial weights on consumer welfare. A survey experiment on a representative sample elicits how shareholders would vote on resolutions giving strategic guidance to firms on what objective to pursue. Only 7% would vote for pure profit maximization. The median individual is indifferent between $0.44 in profits or $1 in consumer surplus, with those owning stocks preferring a lower weight on consumer welfare than non-stockholders. [Emphasis added.]

The author of the Fortune article raises the question, if shareholder primacy obtains, then "[w]hy not let shareholders decide for themselves what their interests are and aren't?" The author contends that the "champions of profit primacy want to limit the range of shareholder input so that raising anything beyond the bottom line is deemed illegitimate." But he asks, "[s]houldn't advocates of shareholder primacy allow companies to pursue social objectives when investors ask them to?"

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