Ethical Investing: Implications for Corporate Law and Corporate Social Responsibility

This chapter explores the implications of ethical investing—the making of investment decisions at least partly on the basis of considerations other than profit or self-interest—for the debate about corporate social responsibility and for certain related questions of corporate law. In particular, I address three topics. First, I argue that, contrary to popular belief, corporate law does not mandate “shareholder primacy,” by which I mean that it does not obligate managers to disregard the interests of nonshareholders or to treat them as merely instrumental considerations in the service of shareholder wealth maximization. My argument highlights the importance of ethical investing for scholars interested in corporate social responsibility, since it turns out to be the preferences and behaviour of stockholders, to a greater extent than corporate law, that constrain managers’ freedom to exercise their powers responsibly. The second topic I address concerns the conflict between the concept of ethical investing and the behavioural assumptions that underlie the standard line of argument in defense of shareholder primacy. Many corporate law theorists who endorse shareholder primacy respond to this conflict by characterizing ethical investing as either irrational and aberrant, or else rational and potentially pernicious. I argue that both of these responses are misguided.