WHAT IS THE GOAL OF CORPORATE LAW?

2025-06-07

What is the goal of corporate law, as distinct from its immediate functions of
defining a form of enterprise and containing the conflicts among the participants in
this enterprise? As a normative matter, the overall objective of corporate law—as
of any branch of law—is presumably to serve the interests of society as a whole.
More particularly, the appropriate goal of corporate law is to advance the aggregate
welfare79 of all who are affected by a firm’s activities, including the firm’s
shareholders, employees, suppliers, and customers, as well as third parties such as
local communities and beneficiaries of the natural environment. This is what
economists would characterize as the pursuit of overall social efficiency.
It is sometimes said that the goals of corporate law should be narrower. In
particular, it is sometimes said that the appropriate role of corporate law is simply
to assure that the corporation serves the best interests of its shareholders or, more
specifically, to maximize financial returns to shareholders or, more specifically still,
to maximize the current market price of corporate shares. Such claims can be viewed
in two ways.
First, these claims can be taken at face value, in which case they neither
describe corporate law as we observe it nor offer a normatively appealing aspiration
for that body of law. There would be little to recommend a body of law that, for
example, permits corporate shareholders to enrich themselves through transactions
that make creditors or employees worse off by $2 for every $1 that the shareholders
gain.
Second, such claims can be understood as saying, more modestly, that focusing
principally on the maximization of shareholder returns is, in general, the best means
by which corporate law can serve the broader goal of advancing overall social
welfare. In general, creditors, workers, and customers will consent to deal with a
corporation only if they expect themselves to be better off as a result. Consequently,
the corporation—and, in particular, its shareholders, as the firm’s residual claimants80
and risk-bearers—have a direct pecuniary interest in making sure that corporate
transactions are beneficial, not just to the shareholders, but to all parties who deal with
the firm. We believe that this second view is—and surely ought to be—the appropriate