Governance and Stakeholders

69 Pages Posted: 6 Jun 2017

See all articles by Vikas Mehrotra

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 2017

Abstract

Economic models routinely assume firms maximize shareholder wealth; however common law legal systems only require that officers and directors pursue the interests of the corporation, leaving this ill-defined. Economic arguments for shareholder wealth maximization derived from shareholders’ status as residual claimants are vulnerable on several fronts. Share valuations fluctuate as sentiment shifts. Introductory finance casts firms as maximizing expected net present values, which are quasirents, expected earnings beyond expected costs of capital from investors, to which shareholders have no obvious claim. Other stakeholders – entrepreneurial founders or CEOs, employees, employees, customers, suppliers, communities or governments, having made firm-specific investments, may exert stronger claims than atomistic public shareholders have to shares of their firms’ quasirents. Consistent with this, their contractual claims are often augmented by residual claims and liabilities. Still, shareholder value maximization constitutes something of a bright line; whereas stakeholder welfare maximization is an ill-defined charge to assign boards that gives self-interested insiders broader scope for private benefits extraction. The common law concept of “the interests of the corporation” captures this ambiguity.

Keywords: Corporate Governance, Stakeholders, Quasi-Rents, Economic Profit, Efficient Contracts, Implicit Contracts, Contractual Claimants, Residual Claimants

JEL Classification: G3, L2, P1, K12, K22

Suggested Citation

Mehrotra, Vikas and Morck, Randall K., Governance and Stakeholders (May 1, 2017). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 507/2017. Available at SSRN: https://ssrn.com/abstract=2971943 or http://dx.doi.org/10.2139/ssrn.2971943

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis ( email )

School of Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2976 (Phone)
780-492-3325 (Fax)

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governence Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Bureau of Finance and Economic Research ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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