The Hybrid Approach
Balancing a Corporation's Economic Desires Against Its Social Responsibility
Ritsa Gountoumas
Posted Monday, July 17, 2017

The principle of shareholder wealth maximization maintains that the ultimate objective of a corporation is to maximize the net value of a business in order to yield higher shareholder gains. Accordingly, a corporation should be governed in a manner that best achieves this objective. On the other hand, corporate social responsibility takes the position that companies have an obligation to consider the social and environmental effects of their business practices. It comes without surprise that in a capitalist society shareholder wealth maximization steals the spotlight, leaving corporate social responsibility in its shadows.

Though shareholder wealth maximization is generally perceived as the “appropriate” operating goal, this paper tackles the question of which theory corporations should employ, ultimately presenting a distinctive view of corporate governance. This paper takes a traditional approach to answering this question, tracing the evolution of each theory and the role courts played in the development of corporate governance. It notes that though courts historically sided with the shareholder wealth maximization norm, modern case law evidenced the emerging importance of corporate social responsibility.

As argued here, the company scandals that pervaded the twenty-first century, specifically the 2010 British Petroleum Oil Spill, revealed a general distrust in the business model and serve to justify a reassessed notion of corporate governance. Rather than exclusively employing one management approach over the other, corporations should employ a hybrid approach. The hybrid approach to corporate governance recognizes that the two theories can co-exist, acting as a limit on the other; it encourages corporations to maximize equity, but only to the extent that such economic objectives do not post detriments to the environment and society as a whole