Shareholders and Social Welfare
William W. Bratton
Institute for Law and Economics, University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)
Michael L. Wachter
University of Pennsylvania Law School
Seattle University Law Review, Vol. 36, p. 489, 2013
U of Penn, Inst for Law & Econ Research Paper No. 13-21
This article addresses the question whether (and how) the shareholders matter for social welfare. Answers to the question have changed over time. Observers in the mid-twentieth century believed that the socio-economic characteristics of real world shareholders were highly pertinent to social welfare inquiries. But they went on to conclude that there followed no justification for catering to shareholder interest, for shareholders occupied elite social strata. The answer changed during the twentieth century’s closing decades, when observers came to accord the shareholder interest a key structural role in the enhancement of economic efficiency even as they also deemed irrelevant the characteristics of the human holders (and beneficiaries of holders) of shares. Under this view, the shareholder interest, as the residual claim on corporate wealth, is directly aligned with society’s interest in maximizing corporate (and therefore societal) wealth and so qualifies for political solicitude. In recent years, the quest for political solicitude has made the jump from theory to practice: a "shareholder class" is said to have risen in our political economy as an off-shoot of the growth of stock ownership by the middle class. Thus do real world shareholders again bear on social welfare. The description of the shareholder class focuses on the diffusion of shareholding downward from its base point among the socio-economic elite into the middle and working classes as the result of pension fund saving schemes and the appearance of cheap, diversified equity investment vehicles. The public dominates the private in the resulting picture of corporate politics: shareholders emerge as a democratic interest group engaged in a struggle with entrenched managers.
We confirm that the shareholder interest has achieved political salience, but take a critical look at the claims regarding shareholders and social welfare. As to the claim regarding the social welfare consequences of maximization of corporate wealth, we make a technical correction: it is not, strictly speaking, a social welfare claim, but a narrower claim addressed to economic efficiency. We then enter an empirical objection to the political economic extension: the shareholder class is not meaningfully middle and retains elite characteristics. It follows that there is nothing inherently democratic (or progressive) about the shareholder interest in corporate politics. Shareholder politics is better described as a contest between two elite groups — corporate managers and investment intermediaries — both of which act as delegees of the same elite class of shareholder beneficiaries.
Number of Pages in PDF File: 40
Keywords: Corporate governance, securities, management, shareholder value, shareholder empowerment, agency cost, wealth distribution, financial markets, law and economics
JEL Classification: D61, G02, G34, K22, O16Accepted Paper Series
Date posted: June 26, 2013
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