Friday, November 27, 2020
In his forthcoming article, “Shareholder Wealth Maximization: A Schelling Point,” my MC-Law colleague, Professor Martin Edwards, offers a new contribution to the long-standing debate concerning shareholder wealth maximization and corporate purpose. (See, e.g., here, here, here, and here.) Professor Edwards is not simply offering a rehearsal of the principled justifications for shareholder wealth maximization as the preeminent corporate purpose. Instead, he proposes a descriptive explanation for why it happened to become the received norm. Though Professor Edwards notes that reformers have offered compelling arguments for why shareholder wealth maximization may be suboptimal, he suggests that, as a Schelling point, it continues to function as a value-creating equilibrium term in the corporate bargain. The article will appear in Volume 74 of the St. John’s Law Review (forthcoming, 2021). Here’s the abstract:
Legal scholars have long debated the nature, meaning, efficacy, and even the very existence of the shareholder wealth maximization norm. Those who model the corporation in terms of its economic efficiency tend to defend it, while those skeptical of it have made a formidable case that corporate governance might be better if managers and directors focused more on worker wealth, environmental sustainability, and various other matters of social importance. If nothing else, the shareholder wealth maximization norm has been a persistent feature of corporate law and governance. This Article proposes that one reason for the norm’s persistence is that shareholder wealth maximization is a Schelling point. A Schelling point is a contextually intuitive way for bargainers to coordinate simply by both acting consistently how each would expect the other to act.
A Schelling point emerges as the solution in bargains where there is more than one value-creating outcome. Confronted with these multiple equilibria, the bargainers often choose the one that is the most contextually unique or intuitive, even if that solution is not optimal. Shareholder wealth maximization is the Schelling point for public investment in corporations because it is a simple and intuitive way to construct the bargain between the managers and directors on one side and the shareholders on the other. When the corporate bargain consists of the shareholders exchanging their capital for nothing more than the surplus value of the corporation, the most intuitive solution to the bargain is a tacit agreement to maximize that surplus value. Like any Schelling point, shareholder wealth maximization may not always be optimal, but it is reliably useful.
I look forward to seeing this in print!