Author:Belinfanti, Tamara

Introduction 581 I. Contested Visions and the Role of Shareholder Value Theory 586 A Contested Visions B. The Rise and Evolution of Shareholder Value Theory 589 C. Why Long-Term Shareholder Value Cannot Be Used to Hold Managers Accountable: The Problem of Uncertainty 596 II. The Systems Alternative 598 A What Is Systems Theory ? 598 B. Systems Theory and the Nature of the Corporation 601 C. Systems and Sustainability 607 D. Systems Theory and the Question of Corporate Purpose 605 E. Systems Theory and the Problem of Measuring Corporate Performance. 611 III. Systems Thinking in Corporate Practice and Corporate Law 619 A. Systems Thinking in Corporate Management 619 B. Systems Thinking in Corporate Law 621 1. St ate Corporate Codes 621 2. Case Law 622 3. Charters and Bylaws 624 C. On the Risks of Ignoring Systems Conclusion 625 630 INTRODUCTION

Any attempt to answer the question "what is a corporation?" is an exercise in negotiating contested visions of the nature and purpose of the corporate form. Some experts say the corporation is a grantee of the state and should serve a public purpose (concession theory). (1) Others describe the corporation as a separate legal entity with the ability to hold property and enter contracts in its own name (entity theory). (2) Still others argue the corporation is not "real" but rather is a nexus of privately negotiated contracts (nexus of contract theory). (3) Or perhaps a corporation should be viewed as an aggregation of natural persons (aggregate theory), (4) or specific assets (team production), (5) or the property of its shareholders (shareholder value theory or shareholder primacy) ? (6)

The recent twin U.S. Supreme Court cases of Citizens United v. FEC (7) and Burwellv. Hobby Lobby Stores, Inc. (8) ring these contested visions of the nature and purpose of the corporation into sharp focus. In Citizens United, Justice Kennedy's majority opinion described corporations as "associations of citizens," (9 )hile Justice Stevens's dissent insisted that corporations are not associations of people but legal entities that "have no consciences, no beliefs, no feelings, no thoughts, no desires." (10) Sevens also observed there are multiple "recognized model[s]" of the corporate entity, including the state grantee, nexus of contracts, and team production models. (11) In Hobby Lobby, Justice Alito repeatedly described a corporation's shareholders as its "owners," (12) implying that a corporation is its shareholders' property, while Justice Ginsberg's dissent maintained that corporations were "artificial being[s]" separate from any individual (13) and further noted that not only shareholders but also workers "sustain the operations of" corporations. (14) In

Citizens United, Justice Steven's dissent spoke of corporate purpose in terms of "maximiz[ing] shareholder value" (15) and "maximiz[ing] the returns on their shareholders' investments." (16) In Hobby Lobby, Justice Alito's opinion for the majority expressed a different view, noting that "modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so." (17)

This judicial disagreement illustrates the clash perceived to exist among the various "recognized models" of the corporation. In particular, Anglo-American corporate scholarship and corporate governance practice have been dominated for most of the past three decades by a "standard" economic account that assumes that shareholders own and ultimately ought to control corporations; that shareholders' principal interest is increasing their wealth; that the interests of other corporate constituencies, like employees and customers, should be protected primarily by contract and regulation; and that the market price of a public company's shares is the principal measure of shareholders' wealth. (18) The result has been widespread embrace of the notion that corporate managers should seek first and foremost to "maximize shareholder value," a philosophy of corporate purpose that is sometimes called shareholder value theory. (19) As the Citizens United and Hobby Lobby opinions illustrate, however, this consensus seems to be falling apart as both the standard model and shareholder value theory have been subject to escalating criticism. (20) Commentators have pointed out that the standard Anglo-American model ignores the significance of corporate legal personhood; (21) that it does not fit with the very limited control granted shareholders under actual corporate law; (22) that the standard model leads to social inefficiency when, as may often be the case, contracts are incomplete and regulation is imperfect; (23) and that stock market prices often fail to capture long-term economic value. (24) Moreover, commentators have associated shareholder value theory with a number of recent corporate scandals and business failures, including the 2008 financial crisis. (25) In this Article, we shed light on and resolve much of the ongoing debate by suggesting a new and more unifying approach to understanding corporations--that of systems thinking.

Systems theory is a design and assessment methodology routinely employed in a wide variety of fields, including computer science, engineering, biology, and environmental science. It can be applied to any process (system) in which multiple elements interact with each other, over time, to achieve particular purposes or functions. We argue that, as potentially perpetual entities that operate under uncertain conditions, public companies in particular can be viewed as complex systems in which multiple elements (e.g., financial capital, physical capital, and human capital) interact with each other to perform a variety of useful and desirable functions (e.g., providing goods and services, employment opportunities, investor returns, and tax revenues).

Applying principles of systems theory allows us to articulate a vision of the corporation that allows for a better understanding of the interaction between an artificial legal entity and its human actors/agents; allows room to consider the role of the state, without which legal entity status could not be conferred; offers new strategies and methodologies for ensuring managerial accountability; and helps us better understand the relationships between and among stockholders, directors, creditors, employees, and the corporate person itself. It also highlights the importance of considering sustainability as a corporate desideratum and offers specific strategies for measuring and improving it. Viewed through a systems theory lens, profits are less an objective than a constraint that must be met for continued operation. Thus, we demonstrate how systems theory offers useful insights into the nature and purpose of corporations and the best way to assess their performance--and, in the process, helps to integrate many apparently conflicting elements of the various contesting visions of the firm. (26)

In Part I of the Article, we provide a brief summary of competing theories of the corporation. We pay particularly close attention to the dominant shareholder value theory and provide an overview of its traditional and current justifications. We show how, while shareholder value theory initially was justified by the factual claims that shareholders own corporations and that shareholders are the sole residual claimants of corporations, today these empirical claims are increasingly being called into question. Instead, supporters of shareholder value theory now typically argue that corporations ought to be run to maximize shareholder value because only shareholder value offers the single, quantifiable metric supposedly needed to constrain agency costs and hold corporate directors and officers accountable. Yet this new justification is also being challenged on several grounds, especially that when shareholder value is equated to stock price or current accounting profits, shareholder value thinking encourages shortsighted business decisions. Thus, shareholder value thinking has been associated with excessive risk taking, reduced investment and innovation, and diminished long-term business performance. (27)

In light of these criticisms, many contemporary shareholder value supporters have reframed their justification: they now speak in terms of maximizing "long-term" value rather than immediate profit or share price appreciation. While reorienting towards long-term value is arguably an improvement over an exclusively short-term focus, especially in light of the possibly perpetual nature of the corporate entity, we show how a shift to a long-term value focus actually reduces shareholder value theory's ability to ensure its stated goal of accountability. We conclude Part I by suggesting that there may be a better approach for evaluating corporate performance and achieving true managerial accountability, while honoring the complexity and diversity of the corporate form: systems thinking.

In Part II, we introduce systems thinking and the idea of the corporation as a system. We survey the basic principles of systems theory and consider what insights they provide about the nature of corporations, their purpose, and how to best measure the performance of a corporate system in order to hold managers accountable. In particular, we show how systems thinking teaches that corporations may serve multiple purposes, and indeed one's view of corporate purpose may depend on one's perspective. (28) Nevertheless, systems theory has developed a variety of methodologies and mathematical techniques that can be used to measure managerial performance (including assessing sustainability). These can determine, if not whether managers are doing the best possible job, at least whether they are doing a better, or a worse one. Thus, the systems approach offers well-developed tools and methodologies for promoting managerial accountability.

In Part III, we turn our attention to some...

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