CORPORATE PURPOSE AND CORPORATE COMPETITION.

• Author: Roe, Mark J.

ABSTRACT

The large American corporation faces ever-rising pressure to pursue a purpose beyond shareholder profit. This rising pressure interacts with sharp changes in industrial organization in a way that has not been comprehensively analyzed and is generally ignored. It is not just purpose pressure that is rising: firms' capacity to accommodate that pressure for a wider purpose is rising as well.

Three possible changes in industrial organization are most relevant: the possibility of declining competition, the counter-possibility of increasing winner-take-all competition, and the possibility that the ownership of the big firms has concentrated (even if the firms themselves have not), thereby diluting competitive zeal. Consider competitive decline: In robustly competitive economies, firms cannot deviate much from profit maximization for expensive corporate purpose programs unless they bolster profitability (by branding the firm positively for consumers or by better motivating employees, for example). In economies with slack competition, in contrast, monopolistic and oligopolistic firms can accommodate purpose pressure from their excess profits, redirecting some or much excess profit from shareholders to stakeholders--to customers, employees, or the public good. By many accounts, competition has been declining in the United States. By some accounts, it has declined precipitously.

That decline suggests three possibilities: One--the central thesis of this Article--purpose pressure has greater potential to succeed if competition has declined or rents have otherwise grown; in competitive markets, the profit-oriented but purpose-pressured firm has no choice but to refuse the purpose pressure (or to give it only lip service), while in monopolistically-organized industries, the purpose-pressured firm has more room to maneuver. Two, the normative bases undergirding shareholder primacy, although still strong, are less powerful in monopolistic markets. Three, declining corporate competition and rising corporate profits create a lush field for social conflict inside the firm and the polity for shareholders and stakeholders each to seek a share of those profits. The result can infuse basic corporate governance with social conflict, contributing to or exacerbating our rising political and social instability. Expanding purpose pressure is one manifestation of this conflict.

INTRODUCTION I. CORPORATE PURPOSE AS EXTRACTING MONOPOLY RENT: THE CONCEPT A. Shareholder Primacy: The Classical Theory, from Milton Friedman back to Adam Smith B. Modern Purpose: More than Just for Shareholders C. Competition Confines Corporate Purpose: The Concept II. EMPIRICAL REALITIES A. Decreasing Competition: The Evidence B. Firms with More Market Power Do More CSR and ESG: The Evidence III. AND WHAT IF COMPETITION IS NOT DECREASING? A. The New Economies of Scale, the New Networks, and the New Skill, Foresight, and Industry B. Expanded Susceptibility to Purpose Due to Scale Economies, Networks, and Skill, Foresight, and Industry C. Cartelization as Monopolization in Competitively Structured Industries: The New Horizontal Shareholding D. Disruptions in Long-Standing Division of the Monopoly Rectangle IV. EXTENSIONS AND IMPLICATIONS A. Normative Implications B. How Purpose Pushes Its Way into the Corporation: Agency Costs and How Purpose Becomes Profitable C. Corporate Governance, Disrupted D. Instability: Political, Corporate, and Otherwise CONCLUSION INTRODUCTION

The public corporation is today pressed more than ever to treat employees, customers, and the environment better, and to be a stronger corporate citizen overall. "A growing cohort--perhaps a majority--of citizens want corporations to be cuddlier, invest more at home, pay higher taxes and wages and employ more people," says a major business publication. (1) For proof of this pressure, one need go no further than the 2019 corporate purpose statement from the Business Roundtable--the elite organization of CEOs of the 200 largest U.S. public firms. Those elite CEOs demoted shareholders from first to last on their list of whom the corporation serves. (2)

The growing strength of purpose pressure is readily understood. Government gridlock leads many to look elsewhere for action. Rising inequality and the threat of climate catastrophe turns activists' attention to corporations to mitigate them. Stock buybacks are seen by the media and social activists as enriching shareholders while employees and the economy suffer. Stories of corporate misbehavior light up internet-connected devices, confirming beliefs that large corporations are enthralled with the primacy of shareholder profit at the expense of the public good.

This controversy surrounding the proper goals for the corporation is thus far devoid of analysis, both in academe and the media, of how major shifts in industrial organization in the U.S. economy during recent decades affect the viability of purpose pressure and its normative character. These two literatures--industrial organization and proper purpose--sit side-by-side, unconnected. Concentration is rising and competition declining in much industrial organization thinking. The corporation must attend to some of society's ills, or at least stop contributing to them, in corporate purpose thinking. But the two streams of thought should not be left separate, as they interact. Powerful private firms attract purpose pressure, and high profits raise that pressure's chance of success. So, our first question is: how readily in the abstract should we expect purpose pressure to succeed or fail as marketplace competition rises and falls? Our second question is concrete: has industrial organization shifted in a relevant way? And, finally, do the two--purpose and competition--affect one another?

Purpose, if the firm takes it seriously, can be costly. In a competitive market with thin profit margins, a firm pressed to, say, pay its employees noticeably more than their productivity warrants cannot prosper. It will be unable to raise capital well, its extra costs will chew away at profits, its sales will suffer, and it will shrink. At the limit it will disappear. Milton Friedman's famous assertion that the proper purpose of the corporation is to make profit for its shareholders fits tightly within a competitive market structure, such as that which the United States was widely thought to have had in the 1970s when Friedman rendered his famous and controversial analysis.

In contrast, a sharp downward shift in competitive zeal with more firms having more market power, means that purpose pressure, even if expensive, cuts into the monopolist's above-normal profits--its rents--not its thin competitive profit. Accommodating the pressure will not be as dire for that firm. It can pay and still prosper. Its monopoly profits will erode, but the firm itself need not lose access to new capital if its profits stay above the economy-wide expected return for capital. Thus reinterpreted, the new corporate purpose movement aims to reallocate supracompetitive profits of the large public firm.

Consider as well how weak competition affects shareholder primacy's normative fitness with the following simple observation: the shareholder primacy command to the board and chief executive officer of a monopoly firm commands them to raise their price and produce less. The higher price produces monopoly profit, and the monopolist typically cuts production so as to sell only to high-value (and therefore high-paying) users. The profit maximization command in an uncompetitive market does not implement the classic analysis of Adam Smith--that the butcher and baker will bring forth protein and bread not out of charitable sentiment but out of self-interest. In a monopoly market, the monopolist butcher and baker will produce less protein and bread than they could, and each will charge too much, leaving too many potential consumers with neither meat nor bread. A charitable purpose might produce more. Hence, weakened competition weakens one justification for limiting the impact of purpose on corporate governance.

The fit between corporate purpose and industrial structure is sound in theory and, we shall see in Parts II and III, corroborated by much, but not all, evidence.

While competitive zeal's interaction with purpose pressure is the most basic connection here, industrial organization thinkers are divided as to whether U.S. competition has sharply declined and, if it has, why. I examine the alternatives' interaction with purpose pressure as well. Understanding these channels and knowing which is more important is vital for proper antitrust policy. But, for the corporate project here, each of the new industrial reorganization understandings has rents rising and, hence, each has more corporate value becoming contestable.

Three rent-increasing channels are widely seen to have altered industrial organization in the United States in recent decades: The first is a sharp competitive decline. The second is that competition has changed, with more winner-take-all competition, steeper scale economies, and more widespread network industries now yielding one competitive winner (or just a few) in an industry. These winners enjoy high profits for the duration of their competitive victory. The third channel sees industry-level competitive structure as satisfactory but share ownership as having become much more concentrated--leading to a small group of large institutional investors owning stock across an industry in ways that slake competitive zeal.

There is also a fourth relevant rents channel. Long-standing rents were once shared with labor decades ago, but in some analyses labor's capacity to obtain these rents has declined or disappeared. This possible channel leads to a similar but more complex analysis and conclusion.

In Part I, I contrast classical corporate purpose--shareholder primacy--with the wider purpose sought today. I then...