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July 09, 2020 Articles

Fiduciaries and the Rise of Stakeholder Capitalism

Successful corporations serve their shareholders by serving their customers.

By Patrick McKnight

A recent announcement by the Business Roundtable sent shockwaves through the business law community. The influential group of executives explicitly endorsed the “stakeholder capitalism” model of corporate law. Stakeholder capitalism is a system in which corporations are oriented to serve the interests of all their stakeholders. Among the key stakeholders are customers, suppliers, employees, shareholders, and local communities. By contrast, the current system of shareholder capitalism prioritizes the rights of corporate shareholders.

The announcement helped intensify a public conversation about the rights of third parties in relation to private businesses. Implicit in this dialogue is the role of fiduciaries.

The fiduciary duty is a cornerstone of business law. At the most basic level, a fiduciary owes a duty to act in the best interest of another. Fiduciaries must act with reasonable care, loyalty, and good faith. In corporate law, directors owe a fiduciary duty to shareholders. A similar duty applies for partners in a partnership. Because shareholders assume the risk of investing equity into a business, their ownership interest also entitles them to the rewards. Although directors are protected by the business judgment rule, directors’ fiduciary duty extends only to a discrete class of individuals standing in a specified legal relationship to the enterprise.

Because the traditional notion of the fiduciary duty involves an elevated standard of care, it has never been extended broadly to individuals and groups beyond the boardroom. Judge Cardozo famously said, regarding the fiduciary duties of partners, “Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” A fiduciary duty is something special, which the law reserves only for certain enumerated circumstances.

The Shareholder Capitalism Model

The robust defense of shareholder capitalism was perhaps most famously promoted by Milton Friedman. Friedman criticized the idea of corporate social responsibility because the resources of the company ultimately belong to the shareholders. If directors wish to donate individually to important social causes, they may do so with their own private property.

Citing the basic tenants of agency, Friedman emphasized the duty executives owe toward shareholders:

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires. . . .
. . . [T]he key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation . . . and his primary responsibility is to them.

Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” N.Y. Times Mag., Sept. 13, 1970.

Although a business must certainly take the interests of employees, customers, and community members into consideration in order to be successful, these relationships are essentially grounded in practicality rather than in morality. These relationships are important but they do not involve fiduciary duties.

The fundamental difference in purpose between a business and a charity lies in the fact that a business is created to generate value for shareholders. A Michigan Supreme Court case, Dodge v. Ford Motor Co., 204 Mich. 459, (1919), is a classic case often cited as a bulwark for the traditional view. Although the implications of the case are sometimes exaggerated, Dodge v. Ford is still read in law schools across the country as a basic introduction to the scope of the business judgment rule and the fiduciary duty of directors to their shareholders.

The court in Dodge v. Ford required Henry Ford to declare a dividend to Ford’s shareholders, explaining as follows:

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes. . . .

Id. at 507.

What Does “Stakeholder Capitalism” Mean and How Would It Affect Fiduciaries?

While shareholder capitalism has reigned supreme throughout the twentieth century, there have always been undercurrents of dissatisfaction and criticism. Detractors suggest stakeholder capitalism willfully ignores important externalities like pollution and inequality. Instead of focusing narrowly on creating value for shareholders, critics suggest justice requires businesses also work in the best interests of all stakeholders. These parties include employees, vendors, members of the community, and even the general public.

Until relatively recently, this strain of criticism was somewhat isolated. This changed on August 19, 2019, when the Business Roundtable shook the business and legal worlds with its landmark announcement. The World Economic Forum made a similar statement at Davos in January 2020.

The Business Roundtable is a group of chief executive officers from some of the largest, most influential corporations in the United States. In their announcement, the powerful group announced a pivot toward “stakeholder capitalism.” The Business Roundtable changed its official statement of purpose from a model for creating shareholder value to one promoting “an economy that serves all Americans.” The statement concludes, “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.” The announcement has been met with reactions ranging from enthusiastic support to confusion and skepticism.

The concept of stakeholder capitalism has enjoyed a resurgence in recent years. The basic idea is that directors should consider more than maximizing shareholder value.

What Does the Fiduciary Duty Mean Today?

Ultimately, public pronouncements lack legal authority. Decades of case law cannot be rewritten with a single press release. The more pressing issue is whether shareholder capitalism will survive in its traditional form. The question has added urgency during the current economic volatility.

If stakeholder capitalism eventually becomes the law for fiduciaries, it won’t be due to announcements from high-profile groups. Change will involve a gradual process of cases and controversies that reflects an evolving understanding of duty, responsibility, and risk.

One of the biggest problems for stakeholder capitalism is the tension it places on the fiduciary duty of loyalty. It remains unclear how an agent can simultaneously serve the best interests of equity holders and society at large. The model seems to demand that fiduciaries act in conformance with an impossibly broad standard.


Peter Drucker outlined a fascinating third approach when he famously said, “There is only one valid purpose of a corporation: to create a customer.” The most successful modern businesses place the customer at the center of their orbit. These corporations work in the best interest of their shareholders as a by-product of working in the best interest of their customers.

Shareholder and stakeholder interests are not necessarily mutually exclusive. Customer-oriented capitalism preserves the primacy of fiduciary duty and shareholder control, while also satisfying the needs of specific third parties.

Patrick McKnight is an associate with Klehr Harrison Harvey Branzburg in Philadelphia, Pennsylvania.

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