Nicolás Domínguez
Sanhueza, Domínguez & Guzmán, Santiago
ndominguez@sdyg.cl

Introduction: water flowing under the bridge

Until quite recently, the purpose of a company was a matter generally accepted without further hesitation. Economic theory, on the one hand, and corporate law, on the other, seemed to be aligned under the common dogma that companies are firms' legal vehicles designed to raise capital and maximise shareholders' wealth. Moreover, it was widely believed that, while pursuing profits, an invisible hand guided companies to promote the interest of the entire society, even more efficiently than if they really intended to promote it. Under this scenario, law students in the United States used to read Dodge v Ford Motor Co,^[1] while law students in jurisdictions with civil law systems, such as Chile, were to memorise even older definitions of a company, both under the same dogma.

Nonetheless, serving shareholders' interests properly has never been an easy commitment, especially if the task involves running a company for longer-term success. Thus, during the last few decades, there have been several changes in managerial economics and business strategy regarding this matter, and the purpose of a company has been a recurring topic – a lot of water has flowed under the bridge, and to top it all off, the discussion doesn't seem to be over, but more alive than ever.

First, since the early 1960s, themes such as the problem of negative externalities, as well as abuses in supply chains, among other corporate scandals, have brought the role of firms into the public discussion. Thus, a whole movement arose claiming corporate self-regulation beyond mere legal compliance, as well as more strict regulations and higher ethical standards for businesses. All these trends used to be listed under the common name of corporate social responsibility (CSR), hence the broadness of its scope. Of course, there were also detractors of CSR. Without any doubt, the most popular detractor was the economist and Nobel Prize winner, Milton Friedman. In his book Capitalism and Freedom, and later in a famous essay published in the New York Times Magazine, Friedman exposed the thesis that, in a free economy, there is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits, provided it stays within the rules of the game, that is, engage in open and free competition without deception or fraud. Friedman argued that CSR's calls for companies' self-restraint comes from the inability of governments to manage their own affairs, and the natural human tendency to pass the buck.^[2]

During the following decades, new approaches emerged regarding the purpose of a firm, such as the notion of a 'stakeholder', deeply rooted nowadays, popularised during the 1980s by Robert Freeman. Pursuant to such a theory, there are several groups involved – and therefore interested – in the performance of a firm, such as employees, suppliers, customers, communities, creditors and, of course, shareholders – and all of them must be considered a 'stakeholder' of the firm. Today, a well-managed relationship with relevant stakeholders is crucial when participating in certain industries.

Another remarkable approach to this matter was made decades later by Michael Porter and Mark Kramer – this time, from a value creation perspective. According to Porter and Kramer, the purpose of a firm must be redefined as what they called creating shared value (CSV), not just profits per se. Under such an approach, firms must view value creation, not narrowly as mere optimisation of short-term financial performance, but broadly as the creation of both economic and social value by addressing society's needs and challenges. By doing so, markets will expand, and firms will achieve new sources of competitive advantages and longer-term success.^[3] The concept of CSV is widely used by firms when defining competitive strategies and operates as a core tenet of tons of corporate missions nowadays.

Probably the corollary from a statutory corporate law perspective was the rise of new types of companies specially conceived by law to pursue public benefit purposes, in addition to – or rather than – profits for their owners. This is the case, for example, with the community interest companies established in the United Kingdom in 2005,^[4] the low-profit liability companies introduced by the State of Vermont in 2008 or the widely spread benefit corporations, first adopted in the State of Maryland in 2010,^[5] and thenceforth in several jurisdictions within the US, including the State of Delaware,^[6] as well as abroad in countries such as Italy (società benefit, 2015)^[7] or Colombia (sociedades de beneficio e interés colectivo, 2018).^[8]

Finally, and notwithstanding the foregoing, the discussion on the purpose of a company reached its peak in August 2019 after the Business Roundtable launched its 'Statement on the Purpose of a Corporation', signed by nearly 200 chief executive officers (CEOs) of most of the largest companies in the US, and committing them to deliver long-term value to all of their corporations' stakeholders.^[9] This statement was reinforced and deeply settled in 2020 when the World Economic Forum launched a new Davos Manifesto called 'The Universal Purpose of a Company in the Fourth Industrial Revolution', declaring that '[t]he purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders, employees, customers, suppliers, local communities, and society at large'.^[10] Both declarations marked an inflection point for companies worldwide by openly expanding the set of theories that had to be generally accepted thereafter.

Shareholder primacy rule (SPR) pursuant to Chilean corporate law

As in most Western jurisdictions, all companies in Chile must be organised with the essential purpose of pursuing profits, with the aim of distributing them among their partners/shareholders (Chilean Civil Code, Articles 2053 and 2055).

This rule comes from the early origins of the Chilean legal framework. Chile, as well as several Western jurisdictions with a civil law system, passed a codification process during the 19th century, inspired mainly by the French Civil Code – colloquially known as the 'Napoleonic Code' – launched in 1804. Almost all those jurisdictions adopted a definition of a company that followed the Napoleonic Code, which defined 'sociètè' as 'a contract by which two or more persons agree to put something in common, with a view to share the benefit which may result therefrom' (French Civil Code, Article 1832). Hence, the Chilean Civil Code, defined company as follows: 'Sociedad or company is a contract by which two or more persons agree to put something in common, with the aim of sharing among them the benefits which may result therefrom. The company forms a legal person, different from the partners individually considered' (Article 2053).

This definition must be interpreted in accordance with Article 2055 of the Chilean Civil Code, which states that '[t]here is also no company without benefit sharing. A purely moral reward not measurable in money shall not be understood as benefit'.

Moreover, the Chilean Civil Code also established a clear distinction between for-profit and not-for-profit legal persons, and all of the Chilean legal framework regarding legal persons is built on such a distinction. Thus, the law conceives companies to be organised for the pursuit of profits for their owners, while non-profit organisations for the pursuit of public benefit purposes without sharing earnings among their founders. In fact, up until the late 1980s, it was not clear, for example, whether publicly held corporations could make donations. This matter was clarified by the capital market regulator of that time, arguing that, as part of their CSR, corporations may donate, provided, however, that such donations should have some connection with their business activities and should not involve a significant amount.^[11]

Both the legal definition of a company and Article 2055 quoted above are mandatory and set forth the foundations of the SPR that govern all types of companies in Chile. Hence, although partners may agree to introduce certain terms into the by-laws regarding a company's purpose – to a greater or lesser extent, depending on the type of company – they must observe that such a company must be organised to primarily pursue profits as indicated.

The SPR is also the core tenet of what the doctrine calls 'corporate interest' (interés social),^[12] which, in turn, is crucial when defining the scope of managers' fiduciary duty. In fact, directors and officers of a corporation, as part of their duties of care and loyalty, are prevented from 'adopting policies or decisions that do not have the corporate interest as their purpose', as well as from 'acting against the corporations' by-laws or the corporate interest' (Law No 18,046, the Corporations Act, Article 42 sections 1 and 7, and Article 50 (Chile)).

Nevertheless, directors and officers are legally bound to decide how to conduct the corporation's businesses, and their fiduciary duties are duties of means, not results; therefore, although there is no express statutory recognition, it is generally accepted that they are protected by a sort of 'business judgement rule' in case a business decision, taken in compliance with their duties, doesn't achieve the expected goals.

In sum, despite the existence of the SPR, managers are provided with wide flexibility on how to run corporations towards the corporate interest. Hence, there will be no breach of fiduciary duty from managers when adopting business models, missions, visions or principles that also consider the interest of other stakeholders, provided they don't overlap the shareholders' interest, and have a proper business reason to support such decisions and policies, a reason that may be easy to prove when following most of the theories referred to in this article.

Finally, this broader approach on how to serve the SPR has been recently encouraged by the capital market regulator by adding environmental, social and corporate governance (ESG) initiatives into the annual report that publicly held corporations and regulated entities must submit.^[13]

Conclusions

1. All Chilean companies must be organised and managed in accordance with the SPR.
2. Most current theories regarding the purpose of a company referred to in this article, aim to provide firms with sources of competitive advantage and assure their sustainability over time. Thus, there may be business reasons for managers to adopt such theories.
3. Therefore, in most cases, adopting such theories could be understood, from a corporate law perspective, not as a subversive change from the purpose of a company, but as a redefinition of how to serve the SPR according to today's challenges.