I have been reading with interest David Millon's new paper, Radical Shareholder Primacy (July 28, 2014), available at SSRN http://ssrn.com/abstract=2473189, which argues that:
Abstract: This article, written for a symposium on the history of corporate social responsibility, seeks to make sense of the surprising disagreement within the corporate law academy on the foundational legal question of corporate purpose: does the law require shareholder primacy or not? I argue here that disagreement on this question is due to the unappreciated ambiguity in the shareholder primacy idea. I identify two models, the 'radical' and the 'traditional.' Radical shareholder primacy originated at the University of Chicago in the later 1970s, first in the work of Daniel Fischel and then in his co-authored writings with Frank Easterbrook. The key point is the assertion that corporate management is the agent of the shareholders, charged with maximizing their wealth. There is no legal authority for this claim; Fischel drew it from the financial economists Michael Jensen and William Meckling, who used the agency idea in a non-legal sense. So those who say that this notion of shareholder primacy is not the law are correct. However, a different conception of shareholder primacy is based on the idea that shareholders hold a privileged position within the corporation's governance structure, enjoying a monopoly over voting rights and the right to bring derivative lawsuits and singled out for special mention in the traditional specification of fiduciary duties as being owed to 'the corporation and its shareholders.' In this sense, shareholders enjoy primacy over the corporation's other stakeholders, although there is no maximization mandate and corporate law is largely ineffective in allowing shareholders to insist that management privilege their interests. Nevertheless, this version of shareholder primacy is enshrined in the law, and, if the radical version's agency claim is laid to rest, there is no harm in acknowledging that fact.
I am prepared to associate myself more or less with David's traditional version of shareholder primacy, which he describes as follows:
This model also claims to privilege shareholders, but its commitment to them is significantly weaker than under the radical version. Under the traditional model, which emerged in the last years of the nineteenth century and was embodied in corporate law and widely accepted for much of the twentieth century, management enjoys broad discretion and is largely inunune from shareholder control." While it is assumed that a business corporation is organized in order to generate profit and, as a practical matter, a corporation that regularly loses money cannot survive long-term, there is no expectation that management must maximize current share price to the exclusion of competing objectives. These can include regard for the interests of non-shareholder constituencies under circumstances management deems to be appropriate, as well as long-term investments that reduce current earnings for the sake of future gains. Certainly there is no sense that an agency relalionship exists between management and shareholders.
I say more or less because I would offer a couple of qualifications. First, for reasons I've laid out in various places, but perhaps most comprehensively here, I think that management can and should have "regard for the interests of non-shareholder constituencies under circumstances management deems to be appropriate [only to the extent management reasonably believes doing so will redound to the benefit of shareholders in the long-term and that management should not do so at all in final period situations]."
Second, and this is mostly a semantic quibble, i understand the term shareholder primacy as making two distinct claims. One goes to the ends of corporate governance and claims that managers have a fiduciary duty to sustainably maximize shareholder returns over the long-term. The other goes to the means of corporate governance and claims that shareholders both do and should have ultimate control of the company. I accept the former but reject the latter. Instead, as I have argued ad nauseam, control of the corporation is vested in the board subject to very limited shareholder accountability mechanisms. Hence, I prefer the term director primacy.
