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Academics in Wonderland: The Team Production and Director Primacy Models of Corporate Governance

63 Pages Posted: 19 Jun 2007 Last revised: 29 Apr 2014

George W. Dent Jr.

Case Western Reserve University School of Law

Date Written: 2008

Abstract

This paper examines the Team Production and Director Primacy Models of corporate governance, finds them wanting, and explains why corporate governance is moving toward shareholder primacy and why this will benefit not only investors but the whole American economy.

The director primacy model posits that shareholders are so ill-informed and so divided in their interests that they would self-destruct if they controlled the firm. Accordingly they tie their own hands by ceding control to a board of independent directors. Advocates of the team production theory often agree with the foregoing but stress the importance to the firm of other constituencies, or stakeholders, including suppliers, customers, creditors and, especially, employees. To obtain the needed commitments from these stakeholders firms must credibly promise to treat them well, but these arrangements are too complex to be specified in contracts. If shareholders controlled the firm, they could renege on their implicit promises to stakeholders. Accordingly, firms hand control to a board of disinterested directors who act as mediating hierarchs to balance the interests of all constituencies.

These theories are riddled with internal contradictions and fail many tests of empirical verification. In my article I expose these problems and show that the current reality of corporate governance is not control by independent, disinterested directors but by CEOs. I then discuss why the alternative -- shareholder primacy -- has not been achieved. I describe both the obstacles to shareholder control and current trends that are facilitating a stronger investor voice. Finally, I suggest that these trends and new ideas may soon lead to real shareholder primacy, and that this will benefit not only investors but the whole American economy.

Keywords: Team production model of corporate governance, director primacy model of corporate governance, mediating model of corporate governance, CEO domination, shareholder primacy, board of independent directors, mediating hierarchs, shareholder control, investor voice

JEL Classification: D21, K22, L20, L21, L22

Suggested Citation

Dent, George W., Academics in Wonderland: The Team Production and Director Primacy Models of Corporate Governance (2008). 44 Houston Law Review 1213 (2008); Case Legal Studies Research Paper No. 07-21 . Available at SSRN: https://ssrn.com/abstract=995186 or http://dx.doi.org/10.2139/ssrn.995186

George W. Dent Jr. (Contact Author)

Case Western Reserve University School of Law ( email )

11075 East Boulevard
Cleveland, OH 44106-7148
United States
216-368-3311 (Phone)
216-368-2086 (Fax)

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