Interesting post by a guest blogger at Conglomerate:
The shareholder primacy norm, as stated on paper, seems like a straightforward decision-making criterion. Corporate directors should make decisions that benefit the shareholders (and by benefit, we mean increase shareholder value). The norm seems to cut through the haze when directors begin discussing other ways to expend corporate resources. The norm is often used as a justification for actions or as a restraint on efforts like charitable giving, improving worker conditions, or doing things that might be seen as "socially responsible." Besides being straightforward, the norm is often thought of as universal and unquestioned. Stephen Bainbridge wrote that the shareholder primacy norm "has been fully internalized by American managers." My own experience with managers does not contradict this view (at least on the surface). In interviewing managers during the research phase of my dissertation on corporate acquisitions, several told me that the first question they asked themselves when deciding whether to pursue an acquisition was, "how does this increase our shareholders' value?"
The problem with the shareholder primacy norm, as I see it, isn't that directors are unsure of what their goal should be. Rather, it is often completely unclear to managers and directors what is the best way to achieve that goal. ...
Instead, if the literature on decision-making is correct (see this paper), directors base their choices on heuristics and institutionalized norms that allow directors to avoid taking undue risks while still attempting to be seen as oriented towards value-maximization.
I agree with most of Brayden's comments; I just don't see this issue as a problem.
Obviously, due to bounded rationality, people often have to rely on heuristics to make decisions. Judges do it (see my paper on that topic), and so do business people.
What the shareholder wealth maximization does in that context is to encourage directors and managers to adopt heuristics intended to be shareholder wealth maximizing. In order not to chill director decision making and risk taking, however, the business judgment rule precludes judicial review of most decisions.
As I explained in my paper, The Bishops and the Corporate Stakeholder Debate, moreover, the shareholder wealth maximization norm does have real legal teeth in those contexts in which management divergence from that norm is most likely-i.e., conflicted interest transactions:
The business judgment rule, however, has no application where the board of directors is disabled by conflicted interests. In such cases, concern for director accountability trumps protection of their discretionary authority. In corporate takeovers, for example, a well-known conflict of interest taints target company director decisionmaking. Not surprisingly, therefore, the law denies directors discretion to consider the interests of nonshareholder constituencies in the takeover setting. To be sure, the interests of shareholders and nonshareholder may be consistent in takeover fights, just as they are in many settings. In light of the directors’ conflict of interest, however, we can no longer trust them to make an unbiased assessment of those competing interests. The conflict between management and shareholder interests requires skepticism when management claims to be acting in the stakeholders’ best interests. A board decision to resist a hostile offer may have been motivated by concern for potentially affected nonshareholder constituencies, but it may just as easily have been motivated by the directors’ and managers’ concern for their own positions and perquisites. Selfish decisions thus easily could be justified by an appropriate paper trail of tears over the employees’ fate. Consequently, in the takeover setting, rigorous application of the shareholder wealth maximization norm properly becomes the standard of judicial review.
In sum, the shareholder wealth maximization norm doesn't require directors and managers to get it right - it just requires them not to cheat.