Public Beginnings, Private Ends - Should Corporate Law Privilege the Interests of Shareholders?

Abstract

This paper questions the extent to which a model of the corporation based upon pre-eminence of shareholder interests is justified. First, it considers the extent to which such a model accurately reflects commercial reality, through an examination of some contemporary trends in corporate finance and in labor law, which indicate a blurring between, for example, the boundaries of debt and equity, and employees and shareholders. Secondly, the paper discusses the normative issue of whether the privileging of shareholder interests is desirable from a policy perspective. This section of the paper focuses on political models of the corporation, which advocate shared governance by institutional investors and management, and the trend towards "collectivization" of the interests of shareholders and managers, reflected, for example, in the rise of pay for performance in the area of executive compensation.

The paper argues that, in spite of widespread acceptance of corporate models which assume shareholder pre-eminence, there are a number of problems and dangers, both from a commercial and policy perspective, in privileging shareholder interests in this way. The article concludes that at a theoretical level, more regard needs to be paid to the interests of the corporation as an autonomous enterprise, combining a wider range of interests than those merely of its shareholders. This, however, is not to deny shareholders an important position in corporate governance. It is in the interests of all corporate stakeholders to prevent managerial self-interest and shareholders, particularly strong institutional investors, may be in a unique position to constrain such conduct for the benefit of the enterprise as a whole.

Keywords: Corporate governance, corporate theory, shareholders, stakeholders, equity, debt, employees, shareholder participation, institutional investors, executive compensation

JEL Classification: D70, G30, J 33, J 38, J 44, K22, K 31, K 33, M 14,