Document Type

Working Paper

Publication Date



Center for Law and Philosophy


Impact investment is attractive to many because it seems to combine support for progressive causes with an apparent commitment to the principles of a market economy. In fact, however, a rational impact investor is not simply creating demand for certain types of corporate actions; he/she is attempting to use corporate governance mechanisms to influence fiduciary decisions of the management. The cost of this tactic for the health of the capitalist economy is potentially very considerable. The American capitalist system relies heavily on a relatively fragile corporate governance arrangement in which the agency problems of a modern corporation are minimized by making shareholder value into the ultimate objective of the management. A crucial assumption in this model is that shareholders are a homogenous group interested in the maximization of financial returns, which makes market price into a reliable criterion of corporate performance. The injection of a more complex corporate objective function – an inevitable consequence of impact investment – raises the potentially insoluble problem of aggregating the diverse interests of the shareholders and seriously weakens the ability of the shareholders to monitor management performance.