Corporate Law’s Traditional Focus on Shareholder Primacy
Traditionally, the purpose of corporations has been framed through the lens of shareholder primacy—the idea that corporations exist principally to maximize profits for their shareholders.[1] This is an established norm and legal theory, rooted in the belief that a clear mandate to pursue profit disciplines managerial discretion.[2] Without such a directive, management would lack the necessary incentives to avoid engaging in self-interested behavior and inefficient business practices.[3] Within this framework, shareholders are treated as the corporation’s residual claimants or “owners” of the business and are therefore entitled to have their interests prioritized.[4] Management’s decisions, accordingly, are expected to be guided primarily by the goal of enhancing shareholder value.[5]
Although it is the generally accepted principle that guides corporate business structures and incentives, shareholder primacy is not without criticism.[6] There are limitations and disadvantages to a shareholder-centric approach.[7] By pursuing profit maximization, management is often inclined to focus on short-term goals, unwilling to take promising business risks, and may pay shareholders at the expense of allocating funds to necessary internal business development.[8] In short, the shareholder primacy framework creates an inherent tension: a corporation’s directors are vested with broad managerial authority, yet are obligated to exercise that authority for the benefit of shareholders rather than for themselves.[9] Modern debate around this approach and its efficacy has brought to the forefront the idea of nonprofit enterprises, which offer a purpose-based approach to generating revenue and profits while providing the basis for successful, prosperous businesses.[10]
The Rise of Nonprofit Enterprises
Nonprofit enterprises are defined as nonprofits (or related charitable organizations such as trusts or foundations) that generate revenue primarily through business operations.[11] These enterprises are typically managed by high-powered and highly compensated managers and are not primarily engaged in charitable causes.[12] Henry Hansmann, an economic and legal scholar, argues that nonprofit enterprises emerged in response to contract failure.[13] Contract failure describes exchanges in which purchasers lack adequate means to determine for themselves whether their payment is actually being used to provide the intended service.[14] This is especially prevalent in industries such as healthcare, education, and childcare, where meaningful opportunities to evaluate goods or bargain with service providers are frequently unavailable to consumers.[15] For example, people who seek hospital care in emergency situations often lack the ability to shop around and compare treatment options.[16] This is a contract failure, which is naturally ameliorated when the producer organizes as a nonprofit.[17]
Without having to distribute residual profits to shareholders, nonprofit enterprises eliminate the need to allocate funds to dividend payments, and thus provide consumers with greater confidence that the good or service is not impacted by profit-maximization efforts.[18] In the example above, the nonprofit form better assures patients that they are receiving medical care from a hospital that prioritizes quality of care, rather than one primarily motivated by profit for shareholders.[19] When consumers cannot meaningfully evaluate the quality of a good or service, especially when they are vulnerable or facing an urgent circumstance, they must rely on the provider’s discretion.[20] Rather than forcing consumers to take blind or uncertain risks in these moments, nonprofits can provide assurance about business quality and performance.[21]
In modern day, nonprofit enterprises are present across a variety of industries, and it is no longer just contract failure that has influenced the rise of this corporate form.[22] Professors Cathy Hwang and Dorothy Lund introduced the “purposeful enterprise” theory, which offers a modern account of the existence and persistence of nonprofit enterprises.[23] Purposeful enterprise theory posits that corporate purpose itself can be a source of value creation and long-term prosperity for businesses, suggesting that nonprofit enterprises can thrive alongside for-profits even though they depart from traditional “good governance” mechanisms.[24] Those mechanisms have historically been justified as necessary to address corporate law’s central concern—managerial agency costs—but purposeful enterprise theory contends that a clearly defined mission can, in some contexts, serve as an alternative disciplining force.[25]
The Tensions Between For-Profit Corporations and Nonprofit Enterprises
Proponents of purposeful enterprise theory are not arguing that it is a perfect fit for all businesses.[26] Rather, this form offers an alternative business structure that can not only mitigate agency costs but also increase employee satisfaction and support successful businesses, all without relying on traditional profit-driven mechanisms.[27]
The efficacy of shareholder primacy and the traditional corporate business structure has and continues to be questioned.[28] The issue of agency costs stands at the center of this ongoing debate.[29] Agency costs are inherent in many businesses, especially those under shareholder primacy.[30] As mentioned, when the owners of an entity are not the managers of the business, managers are incentivized to act in their own self-interest and to the detriment of the business.[31] Self-interested behavior may take the form of managers using corporate resources for personal benefit (“perks”), pursuing inefficient or costly deals to increase firm size and their own compensation, or avoiding higher-risk, value-enhancing projects to protect their positions.[32] To curb these self-interested behaviors, corporate governance practices offer solutions rooted in financial reward, namely, tying management’s compensation to the company’s performance.[33] Alternatively, nonprofit enterprises offer a distinct business structure without shareholders that can nonetheless provide direction for management and align incentives, thereby reducing agency costs.[34]
By harnessing corporate purpose as a substitute for shareholder monitoring and intervention rights, nonprofit enterprises can mitigate agency costs in the process.[35] Behavioral economics suggests that a business with a communicated purpose can provide direction for management and serve as a powerful source of employee motivation to work harder and more creatively.[36] Critics of purposeful enterprise theory argue that without the pursuit of profit and the presence of shareholders, there is no way for a company to properly align management’s incentives so that they resist self-interested and costly behavior.[37] Yet, purpose itself can function as an internal governance mechanism.[38] For example, Amazon faced significant employee backlash after selling facial recognition software to law enforcement agencies in 2018 despite internal opposition.[39] Although the sale was profitable, many employees objected on ethical grounds.[40] In a nonprofit enterprise, where management’s obligations are tied to mission rather than shareholder profit, management would not be formally required to prioritize financial return and might have heeded employee concerns not to follow through with the sale.[41]
While the nonprofit form is not superior in all contexts, it nonetheless offers compelling insights that suggest purposeful enterprise theory can address as well, if not better in some instances, the ongoing issues that plague traditional for-profit corporate structures.[42]
Conclusion: A Nod Toward Purposeful Business
Purposeful enterprise theory raises a host of questions concerning the future of the corporation and the dominance of the profit-centric model. Beyond offering an alternative business model, the rise of nonprofit enterprises underscores the central role that the corporate mission can play in long-term success. Consumers are increasingly interested in aligning their purchasing power with their values and are gravitating toward businesses that reflect their social and ethical commitments.[43] Scholars note that the “warm glow” consumers experience when supporting mission-driven firms is neither incidental nor insignificant.[44] Rather, it reflects a broader shift in expectations about the role of business in society.
Corporations are uniquely positioned to act as model citizens, and many large firms have the resources and expertise to combat inequality, shape industry norms, and inspire broader social change.[45] Regardless of whether a corporation is organized as for-profit or nonprofit, it inevitably projects a purpose that resonates with, or alienates, its consumers. Ultimately, the growing interest in nonprofit and purposeful enterprise theory reflects a broader reexamination of what corporations are and what they ought to be. If corporate purpose can operate not as a constraint on success, but as a catalyst for it, then the dominance of purely profit-driven governance may need to be reconsidered moving forward.
[1] See Robert J. Rhee, A Legal Theory of Shareholder Primacy, Harv. L. Sch. F. on Corp. Governance (Apr. 11, 2017), https://corpgov.law.harvard.edu/2017/04/11/a-legal-theory-of-shareholder-primacy/.
[2] See Robert J. Rhee, A Legal Theory of Shareholder Primacy, 102 Minn. L. Rev. 1951, 1952–53 (2018), https://www.minnesotalawreview.org/wp-content/uploads/2018/06/Rhee_MLR.pdf (last visited Feb. 23, 2026).
[3] See Cathy Hwang & Dorothy Lund, Purpose and Nonprofit Enterprise, 125 Colum. L. Rev. 2267, 2276 (Dec. 2025), https://www.columbialawreview.org/wp-content/uploads/2025/12/December-2025-7-Hwang-Lund.pdf.
[4] Jill E. Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, Penn Carey Law Legal Scholarship Repository 637, 648 (2006), https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=2041&context=faculty_scholarship.
[5] See id.
[6] See CFI Team, Shareholder Primacy: Definition, Criticisms, and Key Concepts, Corp. Fin. Inst. (Apr. 11, 2025), https://corporatefinanceinstitute.com/resources/equities/what-is-shareholder-primacy/#:~:text=Shareholder%20primacy%20is%20a%20shareholder,community%2C%20consumers%2C%20and%20employees.
[7] See id.
[8] See id.
[9] See Rhee, supra note 2, at 1961.
[10] See Hwang & Lund, supra note 3, at 2284, 2293.
[11] Id. at 2269.
[12] Id.
[13] Id. at 2270.
[14] Henry B. Hansmann, The Role of Nonprofit Enterprise, 89 Yale L.J. 835, 851 (1980), https://openyls.law.yale.edu/server/api/core/bitstreams/97a51b48-d9d6-45d2-937e-c54399026a30/content.
[15] See Hwang & Lund, supra note 3, at 2270.
[16] See id. at 2270-2271.
[17] Id. at 2271.
[18] See Hansmann, supra note 14 at 844.
[19] See Hwang & Lund, supra note 3, at 2271.
[20] See Hansmann, supra note 14, at 844-845.
[21] See id. at 846-847 (explaining that a nonprofit’s nondistribution constraint—prohibiting the distribution of earnings to owners—reduces management’s incentives to skimp on services since there are no shareholders and a resulting need to divert revenues to them).
[22] Hwang & Lund, supra note 3, at 2272.
[23] Id. Cathy Hwang is a professor at the University of Virginia School of Law, and Dorthy Lund is a professor at Columbia Law School. The two co-wrote an essay titled Purpose and Nonprofit Enterprise which introduces the “purposeful enterprise” theory to explain how nonprofit businesses have nonetheless succeeded without a shareholder-focused model. See Josette Corazza, How to Succeed in Business Without Really Profiting, Univ. of Va. Sch. of Law (Feb. 25, 2025), https://www.law.virginia.edu/news/202502/how-succeed-business-without-really-profiting.
[24] See id. at 2273.
[25] See id. at 2273-2274.
[26] Id. at 2275.
[27] See Corazza, supra note 18.
[28] See George Dallas, Shareholder Primacy: Is this concept fit for purpose?, Int’l Corp. Governance Network (Dec. 2021), https://www.icgn.org/sites/default/files/2021-12/2.1%20Dallas%20Shareholder%20Primacy_0.pdf
[29] See Corazza, supra note 18.
[30] See Hwang & Lund, supra note 3, at 2273.
[31] Id.
[32] LegalClarity Team, What is an Agency Cost? Definition, Types, and Examples, LegalClarity (Dec. 5, 2025), https://legalclarity.org/what-is-agency-cost-definition-types-and-examples/.
[33] See Hwang & Lund, supra note 3 at 2289–2290.
[34] See id. at 2290.
[35] See id. at 2274
[36] See id. at 2274, 2295.
[37] See id. at 2290, 2293.
[38] See id. at 2290.
[39] See id. at 2302.
[40] See id.
[41] See id (explaining how a nonprofit’s elevation of purpose and lack of shareholder influence could have better preserved pathways to employee enforcement of Amazon’s overall mission as opposed to the divergence of interests and resulting backlash that occurred).
[42] See id. at 2274, 2304.
[43] Jonathan Roberts & Gauri Chandra, The Civic Identity of the Ethical Consumer, Voluntas 35, 817–832 (2024), https://link.springer.com/article/10.1007/s11266-024-00650-x. In further support of this trend, a 2023 study found that 95% of consumers take some action to live sustainably, a result directly correlated with consumer spending habits. See Gabby Land, Op-Ed: Patagonia Proves the Success of Sustainable Corporations, Michigan Journal of Economics Blog (Nov. 22, 2023) (evaluating Patagonia, an ethically responsible clothing company whose commitment to the environment encourages consumers to purchase and repurchase its clothing pieces despite its comparatively higher prices).
[44] See Hwang & Lund, supra note 3, at 2314.
[45] See Kenneth C. Frazier, Why Big Business Should Support Legal Aid, Daedalus (Am. Acad. Arts & Scis), https://www.amacad.org/publication/daedalus/why-big-business-should-support-legal-aid.
