I've been asked to contribute an essay on my director primacy model to a forthcoming anthology of recent work in corporate law theory. In this essay, entitled simply Director Primacy, I therefore recapitulate the core themes that have motivated my work in the field for the last decade. In particular, however, I also use this opportunity to respond to some leading criticisms of the model.
Abstract: Since its inception, corporate law has separated ownership and control. Shareholders nominally own the corporation, but they are entitled to exercise almost nonce of the control rights normally associated with ownership or property. Instead, control of the corporation is vested by statute in the board of directors.
This essay is premised on the assumption that corporate law tends towards efficient solutions. Accordingly, the question raised by the separation of ownership and control is why such separation has proven to have tremendous survival value.
The director primacy model was developed to provide just such a rationale. Grounded in Kenneth Arrow’s work on how organizations make decisions, this essay argues that shareholders lack both the information and the incentives necessary to make sound decisions. Overcoming the collective action problems that prevent meaningful involvement by the shareholders, moreover, would be difficult and costly. Under these conditions, Arrow predicts, it is “cheaper and more efficient to transmit all the pieces of information once to a central place” and to have the central office “make the collective decision and transmit it rather than retransmit all the information on which the decision is based.” The board of directors serves as the requisite central office.
Keywords: Corporate governance, shareholder primacy, shareholder activism, board centric, board of directors, shareholders
JEL Classifications: K22
You can download the essay from SSRN here. For a complete account of director primacy, however, you ought to buy the book too:
