Abstract

http://ssrn.com/abstract=303780
 
 

Citations (10)



 
 

Footnotes (95)



 


 



In Defense of the Shareholder Wealth Maximization Norm


Stephen M. Bainbridge


University of California, Los Angeles (UCLA) - School of Law


Washington & Lee Law Review, Vol. 50, 1993

Abstract:     
This essay, "In Defense of the Shareholder Wealth Maximization Norm, appeared in the Symposium on New Directions in Corporate Law published in volume 50 of the Washington & Lee Law Review. This essay was written as a reply to an article in the same symposium by Professor Ronald M. Green - "Shareholders as Stakeholders: Changing Metaphors of Corporate Governance," 50 Wash. & Lee. L. Rev. 1409 (1993) - in which Professor Green criticized the dominant view of corporate governance, according to which directors have a fiduciary duty to maximize shareholder wealth. In sharp contrast, this essay argues that the principle of shareholder wealth maximization is both a valid positive account of corporate law and also a legitimate normative proposition.

The essay is grounded in a contractarian approach to corporate governance. The essay begins by observing that in the nexus of contracts theory the concept of ownership goes out the window, along with its associated economic and ethical baggage. Consequently, the traditional justification for shareholder wealth maximization - i.e., that shareholders own the corporation - is unavailing. There is a considerable difference between showing that the traditional private property model is inadequate, however, and showing that we should adopt a new decisionmaking norm to which corporate officers and directors must conform their behavior.

The essay then identifies and critiques the two principal normative arguments running through Professor Green's article. First, Green treats the limited liability rule as a privilege conferred by society, in return for which society can demand socially responsible corporate behavior. My essay points out that this is little more than a revival of the long-dead concession theory of corporate governance. Second, Green contends that limited liability is a mechanism through which shareholders harm nonshareholders by externalizing certain costs onto them. Although this is a more substantial argument, my essay contends that it is not persuasive. Although limited liability does permit such externalities, Green's proposed solution - i.e., allowing/requiring directors to consider the effects of their decisions on nonshareholder constituencies of the corporation - is highly flawed. Such a multi-constituency fiduciary duty would be unworkable, at best, and would significantly increase the agency costs inherent in the separation of ownership and control.

Number of Pages in PDF File: 25

JEL Classification: K22

Accepted Paper Series





Download This Paper

Date posted: March 21, 2002  

Suggested Citation

Bainbridge, Stephen M., In Defense of the Shareholder Wealth Maximization Norm. Washington & Lee Law Review, Vol. 50, 1993. Available at SSRN: http://ssrn.com/abstract=303780 or http://dx.doi.org/10.2139/ssrn.303780

Contact Information

Stephen Mark Bainbridge (Contact Author)
University of California, Los Angeles (UCLA) - School of Law ( email )
385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-206-1599 (Phone)
310-825-6023 (Fax)
HOME PAGE: http://www.professorbainbridge.com
Feedback to SSRN


Paper statistics
Abstract Views: 25,559
Downloads: 2,919
Download Rank: 1,858
Citations:  10
Footnotes:  95
People who downloaded this paper also downloaded:
1. Issuer Quality and the Credit Cycle
By Robin Greenwood and Samuel Hanson

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.281 seconds