The End of Shareholder Wealth Maximization

Abstract

The shareholder wealth maximization (“SWM”) doctrine requires the public corporation to pursue a single purpose to the exclusion of all others: increasing the wealth of shareholders by increasing the value of their shares, within the confines of the law. The doctrine excuses egregious corporate action as required for efficiency. It prohibits the corporation from forgoing even a dime of shareholder wealth to benefit the environment, charities, or the corporation’s other stakeholders.
After reaching its zenith in the 1990s, SWM has been in decline — both in academia and the corporate world. Most scholars writing today oppose it. Corporations, in corporate social responsibility reports, advertising, and even corporate governance policies, proclaim their intention to consider the interests of other stakeholders.
The threat that abandoning SWM will somehow impair corporate efficiency remains the principal barrier to reconceptualizing the public corporation. This Article seeks to end SWM by debunking the six theories used to justify it: (1) corporate law requires SWM, (2) the shareholders own the corporation, (3) the shareholders are the corporation’s residual owners, (4) the directors are the shareholders’ agents, (5) the shareholders have an implied contract for SWM, and (6) SWM enables the shareholders to monitor the directors via the stock price. This Article’s review of the literature shows that legal scholars have thoroughly discredited each of those theories.
Three circumstances assure that the threat of impaired efficiency is bogus. First, corporations not subject to the doctrine are competitive with U.S. corporations. They include European corporations formed in non-SWM jurisdictions and U.S. corporations formed in non-SWM states. Second, U.S. public companies are decreasing in number in recent decades, while foreign domestic corporations are increasing in number. Third, Delaware does not enforce its duty to SWM. Delaware directors are free to ignore it. Removing the fig leaf of law and norms purporting to require SWM and debunking the theory supporting it may be enough to finally end it.

Keywords: shareholders, ESG, shareholder wealth maximize, SWM