Brooklyn Journal of Corporate, Financial and Commercial Law, Vol. 2, No. 1, pp. 41-67, Fall 2007
28 Pages Posted: 20 Jun 2007 Last revised: 11 Mar 2008
Date Written: June 2007
It is possible that the director primacy model risks increased agency costs in exchange for more managerial freedom of initiative which leads to superior corporate performance while the shareholder primacy model, if viable, contributes to ex post and ex ante inefficiencies. As an empirical matter, share prices likely reflect the terms of corporate governance. Limited shareholder power regarding day-to-day management and takeover attempts is consistent with an accurate description of how corporations work as well as with the necessity of constraining accountability to preserve authority. Since we are contractarians, we prefer the director primacy model and embrace shareholder weakness. Whether we are right or not, it seems clear that there is a growing debate in corporate governance law about how power should be allocated among directors, shareholders and management. There has been a blizzard of scholarship which shares the goal of increasing the power of shareholders as a vehicle for improving corporate performance by constraining agency cost. By contrast, corporate law scholar, James McConvill, avoids the agency cost argument for increased shareholder control and instead, argues that shareholder empowerment should be seen as an end in itself. His recent article supplies a novel approach to corporate governance. While the satisfaction of selfish motives remains an undisturbed objective, material gain as a maximand is exchanged for a participatory experience. McConvill disputes prevailing conceptions of rational choice analysis and argues that the perceived logic which encapsulates rational choice theory fails to appreciate the non-financial benefits (shareholder happiness) that can be derived from increasing shareholder power. McConvill's fresh look requires an explanation and a critique. This article is the first of a series of articles that offer critical analysis to vitiate McConvill's Panglossian conclusions.
Keywords: shareholder participation, corporate governance, takeovers, director primacy, McConvill, managerial freedom, allocation of power, rational choice theory
JEL Classification: G30, G32, G34, K22
Suggested Citation: Suggested Citation
Hutchison, Harry G. and Alley, R. Sean, Against Shareholder Participation: A Treatment for McConvill's Psychonomicosis (June 2007). Brooklyn Journal of Corporate, Financial and Commercial Law, Vol. 2, No. 1, pp. 41-67, Fall 2007; George Mason Law & Economics Research Paper No. 07-23. Available at SSRN: https://ssrn.com/abstract=993209