Wednesday, June 3, 2015

Shareholder Primacy/Wealth Maximization

I just returned early Monday from this year's Law and Society Association conference.  I presented my paper on LLC operating agreements as contracts--about which I later will blog here--on a panel as part of a CRN (Collaborative Research Network) on corporate and securities law.  I enjoyed the conference and being in Seattle (a city I rarely get a chance to visit).

I noticed something in a number of the sessions I attended, however, that I want to share here.  A number of scholars referenced, in their presentations or in comments to the presentations of others, "shareholder primacy."  As I listened, it was clear these folks were referring to the prioritizing of shareholder interests--especially financial interests--ahead of the interests of other stakeholders in corporate decision-making, rather than the elements of corporate control (few as there are) enjoyed by shareholders.  As I began to recognize this, several things happened in rapid succession.

First, I remembered David Millon's recent paper on this subject, which (among other things) tells a history of the use of the "shareholder primacy" term.  It's well worth a read.  Or a re-read!

Second, I remembered Steve Bainbridge's earlier work on this same topic. Ditto on that paper; read it or re-read it.  His chart in Figure 1 of that paper is an amazing visual summary.

Third, and largely as a result of those two papers, I wondered why we use the same term for these two aspects of corporate modeling (whether you label them them radical versus traditional shareholder primacy, shareholder protection versus monitoring, corporate ends versus means, or anything else).  It's confusing!  I kept wanting to interrupt, as folks were using "shareholder primacy," to ask: "which kind?" to move my understanding and analysis further forward faster.

Here's my pitch.  I advocate moving away from using the term "shareholder primacy" when a more specific term is available.  In the alternative, I advise defining the use of "shareholder primacy" in context when it is used, whether orally or in writing.  Am I alone in being unsettled by this?   Am I being too pedantic or controlling in my advocated solution or advice?  I welcome your views.

Business Associations, Corporate Governance, Corporations, Joan Heminway | Permalink


You are not alone. In the past, I have dropped a footnote to explain, but I agree that we could benefit from more precise terms.

Posted by: Haskell Murray | Jun 3, 2015 8:47:08 AM

As David and I wrote in a Michigan Law Review piece in 1989, the terminology should be "shareholder control" for the power aspect and "shareholder primacy" for the focus aspect.
Lyman Johnson

Posted by: Lyman Johnson | Jun 3, 2015 5:05:08 PM

Thanks, Haskell and Lyman. And yes, Lyman, I also should have cited to and recommended the formative paper on the topic that you and David wrote way back when. Thanks for mentioning it here.

I think the reason why people want to use "shareholder primacy" to describe the control aspect is that "director primacy" is a control label. So, there is some rhetorical symmetry to referring to both control theories using the "primacy" label. Any thoughts on that?

Posted by: joanheminway | Jun 3, 2015 10:33:46 PM

I know you cite to Steve's paper above, but I think it's worth quoting the following:

Although often used interchangeably, the terms “shareholder primacy” and “shareholder wealth maximization” express distinct concepts. As we have seen, shareholder primacy encompasses a decisionmaking model vesting ultimate control in the shareholders. In contrast, the narrower concept of shareholder wealth maximization charges directors with managing the corporation so as to maximize shareholder wealth, but without prescribing any particular model of corporate decisionmaking. In rejecting shareholder primacy's insistence on ultimate shareholder control of corporate governance, director primacy does not discard the concept of shareholder wealth maximization as a bargained for right of the shareholders.

Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U. L. Rev. 547, 574 (2003).

Posted by: Stefan Padfield | Jun 4, 2015 8:16:32 AM

Nice quote, Stefan. Thanks for commenting.

So, the tension is that other important scholars assert that "shareholder primacy" should be the term used for the "end" rather than the "means" concept (leaving another term, e.g., as Lyman suggests above, "shareholder control" for the "means" categorization). Your post juxtaposed with Lyman's, as well as my experience at the conference, indicates clearly why I think there's a problem with our nomenclature.

Can this be fixed, or are we stuck with just defining our terms/concepts clearly in writing and oral presentations?

Posted by: joanheminway | Jun 4, 2015 8:26:14 AM

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