Should a Duty to the Corporation Be Imposed on Institutional Shareholders?

Abstract

The common law principle that directors owe a primary duty to their corporation and a secondary duty to the shareholders of that corporation, has been gradually eroded by the federal securities laws so that directors are charged with owing duties to shareholders, with the corporation and other corporate constituents relegated to a lower status. Further, the shareholder primacy model has become the dominant model in scholarship theories with regard to the firm, although other models have been proposed and debated. Under the shareholder primacy model, shareholders are considered the "owners" of the corporation and therefore given rights at the expense of other corporation constituents. Although modern institutional investors do not behave like owners of corporate property, the shareholder primacy norm has been strengthened and reinforced by the Sarbanes-Oxley Act of 2002. Further, in the wake of recent corporate scandals, institutions have been demanding more rights, specifically more rights with respect to the nomination of corporate directors. In view of these demands, this Essay will inquire as to whether large shareholders should obtain any such rights without also acquiring duties to the corporations in which they invest and to other shareholders.

Keywords: corporations, governance, directors, shareholders, institutional investors

JEL Classification: K22, K23