Is Shareholder Profit Maximization Efficient? Improving the Societal Efficiency of Corporations

From Shareholder Supremacy Theory to Stakeholderism

Abstract

This article fundamentally challenges the dominant corporate social responsibility (CSR) paradigm by arguing that structural governance reform (stakeholder boards) is necessary because voluntary CSR, disclosure requirements, and external regulation cannot adequately internalize externalities when boards are legally bound to prioritize shareholder interests. It fundamentally reframes CSR from a voluntary ethical choice or matter of “enlightened” management discretion to a structural governance problem. It challenges the dominant assumption that shareholder profit maximization maximizes societal efficiency. It demonstrates formally that when externalities can be externalized, shareholder profit (M) diverges from societal efficiency (E), sometimes dramatically. Current corporate law compounds this problem by legally obligating directors to pursue the misleading profit figure rather than genuine social value. The proposed solution offered is that stakeholder board representation offers a more direct and potentially more efficient mechanism for internalizing costs than relying on external regulation alone. Voluntary environment, social and governance reporting, stakeholder consultation, and investor pressure all fail because they leave intact the fundamental board structure that creates incentives to externalize. Stakeholder representation addresses the root cause.

Keywords: stakeholder board; shareholder profit maximization; societal efficiency; corporate social responsibility; stakeholderism.