Shareholder Primacy and Managerial Accountability

Abstract

Shareholder primacy is increasingly considered as the most effective way to foster managerial (corporate) accountability. Contrary to this now standard argument, we consider that shareholder primacy, rather than gatekeeper failure, is directly responsible for the multiplication of accounting irregularities and the dramatic increase in executive compensations. To defend this thesis, we propose a new reading of Berle and Means (1932), Galbraith (1973) and Alchian and Demsetz (1972), stressing the logical failure of a control of the business firm provided for by stock markets: the implementation of shareholder primacy implies a partial disconnection between access to internal knowledge and empowerment. In turn, this disconnection favours deceptive behaviours on the part of corporate insiders. Empirical evidence mostly based on Enron-era financial scandals illustrates our argument.

Keywords: shareholder primacy, managerial accountability, theory of the firm

JEL Classification: D23, G30, L20