Corporate Goal

The worldwide economic crisis in 2008 was a test in which most of the basic axioms of the corporate world collapsed. It emerged that the scale of the market failures and human greed do not allow businesses to be run without regulatory oversight.

This volume by Prof. Yedidia Stern, along with his previous book, Ownership in Companies, deals with one important way of understanding how the worldwide crisis came about, and both books suggest a practical and principled manner of dealing with it. In the first book, Prof. Stern suggested that a company is an ownerless independent entity. This claim is supported in the theoretical world in the legal domain and recognition of facts in the real world, leading to the conclusion that corporate shareholders should not be viewed as owners of the company. This volume deals with an overlapping and complementary issue: What is the purpose of a corporation’s activity? On whose behalf is it supposed to operate? What functions and goals should guide its path?

The question of ownership and the question of purpose are intimately connected. Most human wealth is concentrated in the hands of corporations, which accordingly exert a strong influence on people’s lifestyles, quality of life, and even the very existence of many individuals. The wealth and interests of companies propel forces that influence the media, culture, science, politics, and the marketplace of ideas. At key junctures, Western corporations—including banks, insurance companies, industrial and service companies, giant concerns and small businesses—chose the path that brought them large short-term profits consistent with the interests of investors, and did not give sufficient weight to the interests of other parties. The lack of sufficient attention to others swept the Western economy to dangerous places. This choice has had a negative influence on the economic, political, and social environments.

This book examines a view that is widespread in common law—namely, that the purpose of a company is to make a profit for the shareholders—and exposes the shortcomings of this view from the perspective of economic utility. Next, alternative answers to the riddle of purpose, offered by comparative law or discussed in the theoretical literature, are examined and found to be unsuitable. Finally, the book recommends the appropriate purpose for the corporation—increasing the profit of society as a whole. This idea has many ramifications and has the potential to promote objectives of economic efficiency alongside a proportionate consideration of valuable social objectives. The book also examines the suitability of the proposed Israeli Corporations Law and suggests a possible interpretation of the law.