New Thinking on ‘Shareholder Primacy’

28 Pages Posted: 21 Feb 2011  

Lynn A. Stout

Cornell Law School - Jack G. Clarke Business Law Institute

Date Written: February 18, 2011

Abstract

By the beginning of the twenty-first century, many observers had come to believe that U.S. corporate law should, and does, embrace a “shareholder primacy” rule that requires corporate directors to maximize shareholder wealth. This Essay argues that such a view is mistaken.

As a positive matter, U.S. corporate law and practice does not require directors to maximize shareholder wealth but instead grants them a wide range of discretion, constrained only at the margin by market forces, to sacrifice shareholder wealth in order to benefit other constituencies. Although recent “reforms” designed to promote greater shareholder power have begun to limit this discretion, U.S. corporate governance remains director-centric.

As a normative matter, several lines of theory have emerged in modern corporate scholarship that independently suggest why director governance of public firms is desirable from shareholders’ own perspective. The Essay reviews five of these lines of theory and explores why each gives us reason to believe that shareholder primacy rules in public companies in fact disadvantage shareholders. It concludes that shareholder primacy thinking in its conventional form is on the brink of intellectual collapse, and will be replaced by more sophisticated and nuanced theories of corporate structure and purpose.

Keywords: corporate governance, shareholder primacy, social responsibility, corporate structure

Suggested Citation

Stout, Lynn A., New Thinking on ‘Shareholder Primacy’ (February 18, 2011). UCLA School of Law, Law-Econ Research Paper No. 11-04. Available at SSRN: https://ssrn.com/abstract=1763944

Lynn A. Stout (Contact Author)

Cornell Law School - Jack G. Clarke Business Law Institute ( email )

Myron Taylor Hall
Cornell University
Ithaca, NY 14853-4901
United States
607-255-8431 (Phone)

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