Rick Alexander
Rick Alexander, Founder, The Shareholder Commons; Author: Benefit Corporation Law and Governance
Rick Alexander: I spent the first 25 years of my career as a corporate lawyer, operating under the shareholder primacy model. It isn’t an amoral model—it just posits that externalities are the concern of government, and not of industry. Where limiting pollution or protecting workers is a primary concern, then you relied on regulation, not corporate governance. As time passed, I just realized that clearly wasn’t sufficient. Companies externalized lots of social and environmental costs in order to earn profits, and the government wasn’t always able to address it—for a long list of reasons.
That understanding led me to get involved with the movement to create the public benefit corporation (PBC) law, which gives companies an option to adopt a corporate form that allows them to pursue profit, but still prioritize the effect that they have on systems. I spent four years at as Head of Legal Policy at B Lab working on the problem at the level of individual companies, but I realized that it doesn’t work to just sort of flip a switch and say, “OK companies, now you should prioritize systems over your own financial returns.” Those companies are embedded in a really big, entrenched financial system that is still based on individual company financial return as the measure of success. In our economy, the managers of individual companies make the resource allocation decisions that government would make in a command economy. And ultimately those decisions are judged by one metric, which is whether they’re returning money to shareholders. In that environment, no matter how good any one individual’s motivations are, they’re swimming against the tide if they try to prioritize systemic concerns. It’s not going to work unless we change the paradigm and allowcompanies to take a broader view.
During my time at B Lab I realized there was, in fact, a group that was well-situated to take the broader, systemic view because they had the right incentives and the necessary power over companies: the institutional shareholders. Because when the economy is harmed by cost externalization, the value of a diversified portfolio falls — that’s just math. This idea has been called “universal ownership theory.” When portfolios are highly diversified, like they are at major institutional investors, individual company externalities get internalized by other companies in the portfolio: for instance in their insurance premiums, costs of disasters, reduced demand, reduced productivity, etc. So diversified shareholders need to steward the entire system, not just individual company financial returns. The logic is pretty clear and some asset managers are starting to get it. But understanding it is different than practicing it.
