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New Thinking on "Shareholder Primacy"

New Thinking on "Shareholder Primacy" By the beginning of the twenty-first century, many observers had come to believe that U.S. corporate law should, and does, embrace a “shareholder primacy” rule that requires corporate directors to maximize shareholder wealth as measured by share price. This Essay argues that such a view is mistaken.As a positive matter, U.S. corporate law and practice does not require directors to maximize “shareholder value” but instead grants them a wide range of discretion, constrained only at the margin by market forces, to sacrifice shareholder wealth in order to benefit other constituencies and the firm itself. Although recent “reforms” designed to promote greater shareholder power have begun to limit this discretion, U.S. corporate governance remains director-centric.As a normative matter, several lines of theory have emerged in modern corporate scholarship that independently explain why director governance of public firms is desirable from shareholders’ own perspective. These theories suggest that if we want to protect the interests of shareholders as a class over time—rather than the interest of a single shareholder in today’s stock price—conventional shareholder primacy thinking is counterproductive. The Essay reviews five of these lines of theory and explores why each gives us reason to believe that shareholder primacy rules in public companies in fact disadvantage shareholders. It concludes that shareholder primacy thinking in its conventional form is on the brink of intellectual collapse, and will be replaced by more sophisticated and nuanced theories of corporate structure and purpose. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting, Economics and Law de Gruyter

New Thinking on "Shareholder Primacy"

Stout, Lynn A.
Accounting, Economics and Law , Volume 2 (2) – Jun 8, 2012
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Publisher
de Gruyter
Copyright
Copyright © 2012 by the
ISSN
2152-2820
eISSN
2152-2820
DOI
10.1515/2152-2820.1037
Publisher site
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Abstract

By the beginning of the twenty-first century, many observers had come to believe that U.S. corporate law should, and does, embrace a “shareholder primacy” rule that requires corporate directors to maximize shareholder wealth as measured by share price. This Essay argues that such a view is mistaken.As a positive matter, U.S. corporate law and practice does not require directors to maximize “shareholder value” but instead grants them a wide range of discretion, constrained only at the margin by market forces, to sacrifice shareholder wealth in order to benefit other constituencies and the firm itself. Although recent “reforms” designed to promote greater shareholder power have begun to limit this discretion, U.S. corporate governance remains director-centric.As a normative matter, several lines of theory have emerged in modern corporate scholarship that independently explain why director governance of public firms is desirable from shareholders’ own perspective. These theories suggest that if we want to protect the interests of shareholders as a class over time—rather than the interest of a single shareholder in today’s stock price—conventional shareholder primacy thinking is counterproductive. The Essay reviews five of these lines of theory and explores why each gives us reason to believe that shareholder primacy rules in public companies in fact disadvantage shareholders. It concludes that shareholder primacy thinking in its conventional form is on the brink of intellectual collapse, and will be replaced by more sophisticated and nuanced theories of corporate structure and purpose.

Journal

Accounting, Economics and Law – de Gruyter

Published: Jun 8, 2012

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