Evaluating the Shareholder Primacy Theory: Evidence from a Survey of Australian Directors

Abstract:     
An important debate in corporate governance concerns the validity of the shareholder primacy theory, a theory which depicts the role of company directors as primarily being to act in the interests of shareholders and maximize the wealth of shareholders. This paper reports the results of a survey of company directors that had, among its objectives, testing the validity of the shareholder primacy theory.

The authors present the survey findings on four questions: 1. whether directors prioritize the interests of shareholders above the interests of employees and other stakeholders; 2. whether, if that is the case, the source of that prioritisation lies in legal obligation or duty; 3. whether directors in types of companies corresponding to the market/outsider model are more inclined to prioritize shareholder interests (the authors test two models derived from the work of others - the market/outsider model and the insider/relational model where the market/outsider model is based upon indicators such as the company being listed and higher levels of shareholdings by institutional investors); and 4. whether the prioritisation of shareholder interests tends to come at the expense of employees.

The key conclusions of the authors include: 1. The shareholder primacy view of directors' priorities has considerable cogency but the results of the survey indicate that this cannot be reduced to a simple proposition that directors will necessarily pursue shareholders' interests at the expense of other stakeholders. There is very little evidence, for example, that directors see short term returns to shareholders through share price or other short term gains as a priority. Clearly, though, shareholders are seen as important and, probably, the most important, of stakeholders. 2. How this prioritisation plays out in directors' minds, however, is far from clear cut. It evidently does not follow that other stakeholders are not prioritised or that their interests are not attended to or seen as legitimate. Other evidence derived from the survey results indicates that employees, for example, are also ranked highly in these respects and sometimes ranked more highly than shareholders. 3. Whatever the normative strength of the shareholder primacy view, shareholder primacy is not derived from a legal obligation on the part of directors, nor is it derived from a view by directors that they are under an obligation to pursue such a policy. Directors indicate that they are legally free to pursue any strategy which they feel will benefit all stakeholders.

Working Paper Series