Director Primacy

25 Pages Posted: 25 May 2010  

Stephen M. Bainbridge

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

Date Written: May 25, 2010

Abstract

Since its inception, corporate law has separated ownership and control. Shareholders nominally own the corporation, but they are entitled to exercise almost nonce of the control rights normally associated with ownership or property. Instead, control of the corporation is vested by statute in the board of directors.

This essay is premised on the assumption that corporate law tends towards efficient solutions. Accordingly, the question raised by the separation of ownership and control is why such separation has proven to have tremendous survival value.

The director primacy model was developed to provide just such a rationale. Grounded in Kenneth Arrow’s work on how organizations make decisions, this essay argues that shareholders lack both the information and the incentives necessary to make sound decisions. Overcoming the collective action problems that prevent meaningful involvement by the shareholders, moreover, would be difficult and costly. Under these conditions, Arrow predicts, it is “cheaper and more efficient to transmit all the pieces of information once to a central place” and to have the central office “make the collective decision and transmit it rather than retransmit all the information on which the decision is based.” The board of directors serves as the requisite central office.

Keywords: Corporate governance, shareholder primacy, shareholder activism, board centric, board of directors, shareholders

JEL Classification: K22

Suggested Citation

Bainbridge, Stephen M., Director Primacy (May 25, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-06. Available at SSRN: https://ssrn.com/abstract=1615838

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

Paper statistics

Downloads
1,098
Rank
14,230
Abstract Views
5,474