Finding the Third Side is a series that highlights opportunities for taking a third side approach to difficult decisions about the most pressing issues of the day. Our hope is to provide support for navigating disagreement in a constructive, principled way during this period of heightened conflict.
The Debate:
The debate between shareholder primacy (The Friedman Doctrine), and stakeholder capitalism (The Freeman Doctrine), is a tale as old as time for many of us. Although the emphasis shifts based on the economic and political climate, the debate remains a live one (for example, Beyond Shareholder Primacy and From Shareholder Primacy to Stakeholder Capitalism) and the implications are not theoretical. For managers, directors, and investors on the ground, managing these dueling tensions is only becoming more difficult.
What This Means in Practice: Many of you have experienced this tension firsthand, trying to figure out what fiduciary duty requires (and permits) in specific moments, especially when profit maximization and stakeholder considerations pull in opposite directions. A few places we see this play out repeatedly are:
- When value creation and profit timelines diverge. Decisions about investing in a supplier relationship, a community program, an employee benefit, for example, where the return is real but it won’t show up for several years. Or a decision about shutting a plant or cutting a division to meet short-term budget constraints. The models used to make these decisions can make the math look deceptively clear, but generally don't address how decisionmakers should balance between short-term and long-term goals.
- Taking a public position on a political or social issue. A piece of legislation, a court ruling, a cultural flashpoint. One segment of customers or employees cares a lot about the issue, but another segment feels the opposite, and staying silent will be interpreted as a position too. Or a particular piece of legislation or rulemaking could cause short-term pain for your company but in the long-term will improve the operating environment and allow for greater value creation. Without a clear purpose, it can be near impossible to determine when your fiduciary duty supports advocating for public policy positions (and which ones), making a public statement, or staying silent.
We see these scenarios play out over and over again, across industries and geographies, and company size, and the decisions they require have material impacts.
The Third Side:
Even though it is easier to deal in absolutes, companies do not exist solely to maximize profit for shareholders, and neither do they exist to ignore profit altogether (see Eric Ries’s nuanced discussion of the definition of “profit” in Chapter Five of Incorruptible). Those in the trenches know that running a company means constantly balancing profit for shareholders and longer-term value creation. Broader systemic and regulatory changes could make this balancing act easier over time, but in the meantime, there are steps to take right now that can help.
Fiduciary duty needs an anchor. A clear corporate purpose, and a structure built to protect it, are a good start. Governance can help with both.
- Purpose. When a company hasn't spelled out its purpose clearly and transparently, fiduciary duty tends to default to profit maximization. There are a lot of very thoughtful writings about how we got to this point and why, but part of it can certainly be traced to companies no longer being required to define a clear purpose in order to incorporate. (See The Shareholder Value Myth by Lynn Stout, and The Company: A Short History of a Revolutionary Idea by John Micklethwait and Adrian Wooldridge). Value creation runs along a continuum so sorting what’s core to a company’s purpose from what’s outside it is harder than it looks. The 2019 Business Roundtable Statement on the Purpose of a Corporation, signed by 181 CEOs committed to deliver value to customers, employees, suppliers, and communities alongside shareholders, was one attempt to name a point on that continuum: unfortunately, it never gave decisionmakers a structure to help weigh those obligations against each other when a specific moment like the ones above lands on their desk. That’s where governance comes in.
- Structure. But just defining corporate purpose is not enough. Without a decision-making structure built to protect it, managers and others will continue to face both internal and external pressures that may push in a different direction than fulfilling the corporate purpose. That means naming, ahead of time, who has authority over which kinds of tradeoffs, what triggers escalation to the board, and what standing process a decision like a plant closure or a public position runs though before it’s made. It also means backing that process with the legal structures that make it durable: charter provisions, bylaws, board committee mandates, or an alternative corporate form like a benefit corporation. The legal structures make it more likely that the framework survives a change in leadership or a hostile shareholder rather than depending on whoever happens to be in charge at the time. Without that structure, each of these moments gets litigated from scratch, under time pressure, by whoever happens to be in the room, which is exactly how fiduciary duty ends up defaulting to the easiest number of the table.
Governance determines the structures that control how decisions are made, by whom and when. By acknowledging ahead of time the shareholder/stakeholder tensions that will inevitably arise within a company, thoughtful governance structures can help protect a company’s purpose and ensure fiduciary duties remain anchored to that purpose. Two resources that can help are:
- Eric Ries's Incorruptible shows what this structure actually looks like in practice and provides concrete tools to implement it. His concern is that a narrow, externality-blind definition of profit makes short-termism the path of least resistance, even when no one is affirmatively choosing it. His fix is to use legal structures to create the space to weigh profit and purpose rather than choosing one over the other by default. Whether that is cleaving voting rights from economic rights by setting up a perpetual purpose trust or other entity with decision rights, or embedding the purpose directly into the corporate charter as a benefit corporation, the book includes templates and real examples of companies that have hardwired purpose into their governance in this way.
- Third Side Strategies' Public Affairs Governance Guide ("Principled Influence") focuses on one of the places companies are struggling most with this tension right now: public affairs engagement. The Guide walks cross-functional teams through a self-paced Public Affairs Governance Review that ends in an Engagement Policy. The Engagement Policy is built around five goals that make space for both shareholder and stakeholder interests, considered over varying timeframes: mitigating enterprise risk, enabling long-term value, building stakeholder trust, supporting stable systems, and fulfilling fiduciary duty.
Neither tool resolves the shareholder primacy versus stakeholder argument entirely. What they offer instead is a way out of the ad hoc decision-making that that tension so often forces: without a defined purpose, decisionmakers are left guessing, case by case, what fiduciary duty actually permits when shareholder profit and stakeholder considerations conflict. By anchoring decisions to a clearly defined purpose and embedding that purpose in the company’s corporate governance structures, decisionmakers can act with more confidence that they're fulfilling their fiduciary duty, and companies can act with more confidence that their decisions hold together consistently over time.
Share Your Thoughts:
As you think about how well your company and the decisionmakers in it are prepared and supported to balance these considerations, some questions that may be helpful to consider are:
- Does your company have an articulated, shared definition of its purpose and is decision-making clearly tied to that purpose? Or does profit maximization become the default purpose?
- When near-term profit and longer-term value creation pull in different directions, does the company have established principles to guide its decisions and who has the authority to make that call?
- What market rules would reduce the tension between shareholder profit and stakeholder considerations for managers throughout your organization?
This stuff isn’t easy. The more we talk and share best practices, the better we all will get at finding new ways to the third side, especially during these challenging times. Let us know what you think: please share your thoughts.