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Abstract

This Article explores the legal manifestation of the interaction between the general public and the public corporation. Revisiting team production analysis, this Article redefines the corporate team and argues that while several constituencies indeed form part of the corporate team, others are exogenous to the corporate enterprise. Employees, suppliers and financiers contribute together to the common corporate enterprise, enjoying a long-term relational contract with the corporation, while retail consumers contract with the corporation at arm’s length, and other people living alongside the corporation do not contract with it at all. Under this organizational model, the general public may participate in the team forming the corporate enterprise by providing public financing. Indeed, corporate law was developed to protect public investors.

However, evidence shows that most of the listed equity is no longer held by the general public directly; the new shareholders are institutional investors. This Article analyzes the impact of institutionalization on the interaction of corporations with the general public, outlining spheres of potential divergence between institutional and retail investors and raising the timely concern for the agency costs embedded in the relationship between the general public and institutional investors. First, not all institutional investors are investing on behalf of the public. Shareholder empowerment platforms are frequently mobilized by intermediaries representing only the wealthiest 1%. Second, when shareholders are mostly institutional investors, the likelihood of distributional conflicts between various stakeholder groups is higher because the institutional thought and decision-making patterns do not match those of the general public. The objectives of institutional investors are significantly narrower than, and potentially divergent from, those of the general public. Third, the technology used for trading by institutional investors, algorithmic trading, potentially imposes externalities on retail investors, and ultimately widens the gap between corporations and the general public. It may often be the case that the institutional interests align with those of the general public, but the law does not necessitate it.

This Article further discusses converse trends towards convergence, including socially responsible investments and impact investments, corporate social responsibility, sustainability reporting, and customer voice. This Article ultimately suggests policy implications. When shareholders’ interests are not necessarily aligned with those of the general public, we have reason to revisit the axiom of shareholder value as the underlying purpose of corporations, the boundaries of fiduciary duty, and the limited platform and audience for sustainability reporting.

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