Epistemic status:

Problems discussed and their background - Moderate to strong

Research proposal on shares-with-obligations - Weak. Looking for confirmation that this is worth researching


Stakeholders as referred to in this post is a broader term than shareholders. Shareholders refers to the formal and legal concept. Stakeholder is informally defined as anyone who can influence is or influenced by the actions of an institution including in indirect ways.


This recent tweet thread by Yudkowsky

Your annual reminder that there is no such thing whatsoever as a legal duty for a corporation's Board or management to maximize its profits. This is just a complete myth. Legally, you have a duty "not to loot the company" and "not to do stuff that's totally nuts", basically.

You may also read these personal essays by Visa founder Dee Hock, or Meditations on Moloch by Scott Alexander for inspiration.

Key takeaways

 - Companies are both influenced by and influence a lot of different stakeholders who can have misaligned interests.

 - Companies have implicit reasons to pursue profit-at-all-costs, even if it enters morally grey territory or creates negative externalities for other stakeholders.

 - Key shareholders have ways to defend against this, however these methods have finite power

 - Proposal: Shares-with-obligations could be a promising way for key shareholders to better defend their moral or other principles in the company.

I'm looking for feedback on all of this, but especially the proposal at the end.

Agency problems

(This section is not critical to the rest of the post. You can skip it if you're in a hurry.)

Company actions are both influenced by and affect a large number of different stakeholders. These stakeholders can often have misaligned incentives and end up acting as cross-purposes. Some examples are as follows:

 - Majority versus minority shareholders - In a corporation with only one class of shares, owning a majority gets you very significant power over the future of the company, and almost eliminates the immediate power of the minority. In absence of regulation, one could even imagine actions such as voting to split profits only among the majority and ignore the minority. Or the majority could vote to donate the entire balance sheet including all profits to charity. This however defrauds the minority shareholders if they bought into the company shares with expectation of getting profit in return. In practice, minority shareholders have protections offered by law against the most extreme decisions a majority can take at the expense of the minority. This protection simultaneously acts as a minimum expectation of profit-seeking imposed on companies by law.

 - Big versus small shareholders - This ties into the previous point. It is much easier for a few large shareholders to coordinate to form a majority vote over some decision than it is for thousands of smaller shareholders. This holds true in practice, and small shareholders have very limited protections.

 - Different classes of shareholders - Sometimes companies issue multiple classes of shares - with one class having more voting rights that the other. This can lead to misaligned incentives between the two. Different countries have different restrictions on this.

 - Shareholders versus bondholders - Bondholders will prefer actions that ensure their loans get repaid quicker, while shareholders will likely prefer delaying repayment if this increases long-term growth prospects of the company. In practice, shareholders typically have significant power and bondholders are only protected by law from the most extreme cases. Hence bondholders need to resort to specifying all the terms of the bond repayment upfront in contract, instead of having voting power or steering the ship long-term towards bond repayment.

 - Shareholders versus managers and employees - Shareholders are often passive in their governance of the company. Even if they are active, their power is mostly limited to having seats on the board at the top-level of the company. They need to ensure incentive-alignment between themselves and all the people who actually run the company below them. This is often done by giving managers and employees shares or options on the shares as an extrinsic motivator. Intrinsic motivation is created in employees via company culture. All this is a non-trivial endeavour and a major part of management work in general.

 - Shareholders versus consumers and rest of society - Shareholders often extract value at the detriment of what is optimal for their consumers. For instance social media apps are designed to be addictive despite their users knowing they do not really want this. Yet addiction drives profits and growth potential of the company. Users have no better choice due to network effects and continue using the apps. Shareholders also often place externalities on society beyond their immediate consumers - as can be seen with fossil fuel companies contributing to climate change. Regulation can limit or tax externalities, but usually at a slow pace.

 - Shareholders with different risk profiles and time horizons - Some shareholders may want to maximise share price in the short-term, allowing them to flip the shares to other investors in a short timeframe. Other shareholders may be more interested in long-term growth. Again, with the exception of extreme cases, regulation does not protect either class, and might makes right as majority shareholders out-vote minority. This also applies to risk-loving versus risk-averse decisions, entering or not entering a new industry sector and accepting its sector beta - or any decision where different shareholders have different views on what kind of price movement they find desirable for the shares of that company. 

 - Shareholders with different values beyond profit maximisation - The previous point  on risk profiles also applies more generally to shareholders who also care about things besides profit maximisation. This is explored in much greater detail below.


So do companies always maximise profits?

Well, it depends. There is a clear minimum expectation of profit to satisfy minority shareholders. 

It is possible for a majority of shareholders to agree not to cross some morally grey line or create certain externalities for society. However this coordination becomes harder to achieve as the number of distinct investors required to reach majority increases, and people of different viewpoints and dispositions enter. Shares of public companies often exchange hands anonymously in the public market. This means that the number of shareholders required to reach majority typically increases following an IPO, and the number may even be unknown until people actually announce their shares.

Shares exchanging hands anonymously also means that as a seller, there is no guarantee over what values the buyer has - which direction they wish to take the company or what moral or other dispositions they possess. The main way to avoid this is to find private buyers but again, this requires some degree of trust of the buyers' intentions and isn't easily codified as contract.

Share price is roughly bounded by expected profit that the company will generate until the end of time (barring a lot of market factors that cause the bound to become tighter or looser). In a public market, shares automatically gravitate to whoever thinks the shares are worth the highest. And people are willing to cross moral lines to increase profits will value the shares at the highest price, because they can make a positive return on their investment even after buying at this price. Someone who is not willing to extract that profit will value the shares less - so it will appear worthwhile for them to sell the shares if the market price is higher than this. However, by doing so, they are still potentially allowing the same moral line to be crossed in the first place.

These economic incentives can often end up creating social and reputational incentives that are stronger than the hard economic incentives themselves - with top-level roles, personalities and behaviours being automatically selected for depending on their natural disposition and comfort for profit-at-all-costs. It is ofcourse possible that different economic incentives will also result in different social incentives, this is something explored in the proposal below.

How do you avoid profit maximisation?

Note here that I am referring to profit maximisation regarding decisions that negatively affect other parties. In other words, "profit at all costs". Whether these decisions are unethical can be subjective. Whether these are illegal also varies, in fact most of the time such decisions are completely legal - for instance having net positive carbon emissions or creating addiction in users of your app.

The conventional line of thinking is very similar to that of preventing hostile takeovers. There are clear benefits to retaining a controlling interest in a company - besides just avoiding profit maximisation. Some are already described above. For instance, a founder who wishes to focus heavily on long-term growth may not want to IPO and risk getting diluted by investors who want more immediate returns. Protections against hostile takeovers are more often instituted by company founders, but they can in theory be instituted by any person or group with controlling interest. Some are as follows:

 - Don't sell shares, don't IPO - This is the most obvious. As long as you or a small group of known investors own a controlling interest, you can ensure any sort of values (moral or otherwise) are preserved. This is very common and a viable defence although it limits the amount of capital that can be raised by the company. Such a company may be more reliant on other forms of funding such as loans.

 - "Poison pills" - Key shareholders could issue preferred shares that either only they can buy and no one else, or they can buy at cheaper price. This makes it harder for a hostile interest to buy a controlling stake. This practice may be regulated against though, depending on country.

 - Classes of shares with different voting rights - Shareholders could issue common shares with lesser voting rights, allowing them to raise capital without losing voting rights. Such shares typically trade at a discount of only a few percent to shares with voting rights.

 - Paying money or getting a friendly investor to block the hostile takeover by buying shares - Naturally this is costly and isn't always possible, especially if you expect to generate less profits for the friendly investor (due to whatever moral principle).

 - Inside knowledge - New shareholders do not know the operational details of the company, nor do they have good social connections with all the people running the company. If you make it sufficiently costly (time, social costs, money) for shareholders to acquire this knowledge and these connections - you may be able to push away hostile interests. This practice is somewhat regulated however.

Proposal: Shares-with-obligations

It would be good if there was a way to ensure a company upholds certain principles, without requiring you to always hold a controlling interest in the company. One way would be to sell shares in such a manner that the buyer of these shares has certain obligations placed on them. Violating these will be penalised by law.

Examples of obligations could be a commitment to carbon-neutrality or a commitment to not enter a certain morally grey industry sector.

Naturally, shares-with-obligations may sell at a lower price than common shares - but this can be acceptable for conscientious sellers of shares. Most importantly it will allow founders and other controlling interests to give up their controlling interest, raise a lot more funding while still ensuring the corporation doesn't devolve into profit maximisation at all costs.

Beyond changing the economic incentives of the company, such obligations can also change the social incentives and norms of the company - selecting for people who are more ethical or mindful of these principles to run the company or hold shares or finance them and so on. And even if they don't explicitly start selecting for ethical people, atleast they will stop selecting as strongly for people comfortable with pursuing profit-at-all-costs.

Research will have to be done into what forms of obligations can be codified, what forms of obligations are ethical or unethical to codify, and who is allowed or not allowed to codify such obligations and at what point in time. As well as on the infrastructure - both market and legal - that will support this.

Obligations could be share-specific or company-wide - research will have to be done on whether both models are sustainable. share-specific would mean that if you as a share seller want to place obligations, those obligations only apply to the buyer of your shares (and anyone they further sell these shares to). So the company will essentially have two or more classes of shares, one without obligations and others with. A company-wide obligation would mean that all shares carry obligations.

Research may be required on whether it should be possible to remove such an obligation and who should have power to do this. For instance if all the shareholders (say a supermajority or a majority) wish to collectively remove a certain obligation, it might make sense to let them to do so. Else all companies will be stuck with obligations imposed on them by people who have long-ago exited the company - which they cannot reverse. And there can ofcourse be rare situations where it makes sense - even ethically - to remove an obligation. Legally it might get weird if most of the people who placed the obligations have exited the company, and there is no one left to act as a plaintiff if obligations are violated.

I'm sure there's stuff I'm missing here, I'd be keen to know more.

P.S. I also wonder if you can do this not just with shares but money itself, i.e., governments or private parties can issue currencies-with-obligations. But that's a whole another ballgame.


Sorted by Click to highlight new comments since: Today at 3:00 AM

I think this is a very interesting and important topic. Some quick thoughts:

I didn't understand the 'share-specific obligations' idea. How might such an obligation look like?

Re 'company-wide obligations': maybe that could also be implemented as a contract? E.g. the CEO signs a contract that says that if the company gets caught doing X, they will give a huge amount of money to a certain charity. (And then if the company ever gets caught doing X, the charity will have an incentive to sue the company for that money.)

Regarding different classes of shares: what about having a class of shares that have only voting rights and no dividend rights? Then the founder can keep a majority of the voting power without needing to also have a large financial stake. (I guess this situation can be approximated without inventing a new type of shares by having, say, 1000x more non-voting shares than voting shares.)


I didn't understand the 'share-specific obligations' idea. How might such an obligation look like?

People who use the voting rights of those shares can't vote for decisions that violate those obligations.


Nobody might want founding members / CEOs to retain a controlling interest on all matters, especially after the exit. The founding member themselves may not want this responsibility once they exit the company. People buying shares may not want it, and regulators may not like it because the agency problem becomes extreme here. (Cause here in the extreme, nobody who stands to earn the profits of the company has any say in how the company is run.) I'm not sure 1000x voting rights are even allowed in many countries for this reason, as far as I know there is a limit on how much extra voting rights supervoting shares can have.

In my proposal, the founders have control only to set some principles right before they leave, rather than control all aspects of the company forever.