A Necessary Social Evil: The Indispensability Of The Shareholder Value Corporation

Marc T. Moore
University of Cambridge, Faculty of Law

June 1, 2016

University of Cambridge Faculty of Law Research Paper No. 25/2016


This symposium paper critically evaluates the developing ‘Post-Shareholder-Value’ (‘PSV’) paradigm in corporate governance scholarship and practice, with particular reference to Professor Colin Mayer’s influential theory of the corporation as a unique long-term “commitment device”. The paper’s positive claim is that, while evolving PSV institutional mechanisms such as Benefit Corporations and dual-class share structures are generally encouraging from a social perspective, there is cause for scepticism about their capacity to become anything more than a niche or peripheral feature of the US public corporations landscape. This is because such measures, in spite of their apparent reformist potential, are still ultimately quasi-contractual and thus essentially voluntary in nature, meaning that they are unlikely to be adopted in a public corporations context except in extraordinary instances. The paper’s normative claim, meanwhile, is that while in many respects the orthodox shareholder-oriented corporate governance framework may be a social evil; it is nonetheless a necessary evil, which US worker-savers implicitly tolerate as the effective social price for sustaining a system of non-occupational income provision outside of direct state control. Accordingly, pending fundamental reform of the broader social-institutional context to the shareholder-oriented corporation, the key features of the evolving PSV governance model should remain quasi-contractual as opposed to being placed on any sort of mandatory regulatory footing.

A Necessary Social Evil: The Indispensability Of The Shareholder Value Corporation – Introduction

Scholars of the modern public corporation mutually agree that their subject of study is a truly remarkable institution. Far less commonly agreed upon, though, is precisely why this is so. Over the past four decades, social-scientific analysis of business corporations – at least in the English-speaking world – has been dominated in large part by highly reductionist theories inspired by neo-classical economics, which essentially seek to break the corporation (or “firm”) down to its component human parts. From this general viewpoint, the purported significance of the corporation is typically perceived as residing in its capacity to enable corporate participants (as notional “contractors?) to economize on the transaction costs involved in both financing and organizing complex production projects on a collective scale.

Accordingly, various legal features of the corporation – including limited liability, separate legal personality and centralized board management – have on different occasions been lauded as its apparently key and distinguishing organizational characteristic. At the same time, debate over the rightful distribution of decision-making influence within the corporate structure has steadily burned on, whereby the relative (dis)advantages of allocating legal governance powers to directors versus shareholders have been variously chewed over. However, whilst the instrumental question as to the most effective legal “means” of corporate governance has been a topic of fervent disagreement; the corresponding issue of the ultimate social “end? to which these efforts should be driving at has, until fairly recently, been a conspicuous point of acquiescence amongst otherwise-diametrically-opposed observers.

For the most part, and despite their differences of opinion on other issues, corporate law and governance scholars have tended to agree upon one thing at least: that the overarching normative objective of corporate governance – and, by implication, corporate law – should be the maximization (or, at least, long-term enhancement) of shareholder wealth. Indeed this proposition – variously referred to as the “shareholder wealth maximization?, “shareholder value” or (as will be used here) “shareholder primacy” norm – is so ingrained within mainstream corporate governance thinking that it has rarely been subjected to serious policy or even academic question, besides relatively moderate concerns about the appropriateness of the time horizon over which shareholders? collective financial welfare is most appropriately adjudged by managers and boards.

Although the 1990s witnessed the fairly widespread development of competing pluralist or “stakeholder? understandings of the corporation?s rightful social objectives, such counter-theories rarely garnered much serious consideration within the mainstream. And, where they have been picked up on beyond their own periphery, it has more often than not been for the purpose of discrediting the general stakeholder governance model on account of its alleged practical unworkability. Consequently, at the turn of the present century – and notwithstanding the United States witnessing what was (at least at the time) arguably the country?s most serious ever corporate governance failure in the form of the Enron collapse – the shareholder primacy paradigm was for all intents and purposes still alive and well. Moreover, federal regulatory reforms implemented in the aftermath of the 2007-08 financial crisis – including mandatory shareholder „say on pay? voting and opt-in proxy access – were indicative of a policy agenda which (somewhat counter-intuitively in many peoples? eyes) saw intensification of directors? focus on shareholder welfare as the most appropriate response to the corporate governance and risk oversight lapses exposed in the then-recently failed banks.

A Necessary Social Evil: The Indispensability Of The Shareholder Value Corporation
Shareholder Value Corporation

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