Corporations and Stakeholders
This domain concerns who the corporation is for and how it is governed. Expect questions that contrast shareholder primacy with stakeholder theory, test the board's fiduciary duties and the business judgment rule, and ask you to rank stakeholders by salience in a specific case.
Competing models
- Shareholder primacy: Friedman's position, and Dodge v. Ford (1919), where the court held that a corporation is organized for the profit of stockholders; courts nonetheless rarely second-guess business decisions.
- Stakeholder theory (Freeman): the firm is a nexus of relationships among owners, employees, customers, suppliers, and communities.
- Stakeholder salience (Mitchell, Agle, and Wood, 1997): claimants are ranked by power, legitimacy, and urgency; those holding all three are "definitive" stakeholders and command immediate attention.
Governance mechanics
- The board owes fiduciary duties of care (informed, deliberative) and loyalty (no self-dealing, no usurping corporate opportunities).
- The business judgment rule is a presumption of good-faith, informed decision-making; it protects directors absent gross negligence, fraud, or conflict of interest.
- The agency problem follows from the separation of ownership and control (Berle and Means); monitoring, incentive pay, and disclosure are responses.
- Corporate personhood confers legal capacities such as contracting and, per Citizens United (2010), independent political spending - not moral immunity.
- ESG and the triple bottom line are measurement frameworks that can be consistent with fiduciary duty when they bear on long-term value.
Worked example
A CEO proposes a plant retrofit that will cut emissions and lower long-run costs but miss the next two quarters' earnings guidance. The board must decide. The business judgment rule protects a good-faith, informed decision if the process is documented. Under shareholder primacy, a retrofit with a defensible payback serves long-term shareholder value; pure altruism does not. Under stakeholder theory, the surrounding community's interest counts directly rather than instrumentally. Strong answers separate three questions: is it lawful, was the process sound, and is the substance right.
Traps that cost marks
Believing shareholders literally own every corporate decision; treating "stakeholder" as synonymous with any interested party; assuming the business judgment rule shields self-dealing; and assuming ESG spending is automatically a breach of duty.