Corporate governance and the theory of the firm: a re-assessment of shareholder primacy in the light of limited liability and the position of creditors

The neoclassical theory of the firm presents an impressive analysis in which the primacy of owners’ interests is asserted. It offers powerful insights into the contracting and monitoring challenges that arise when owners, as principals, delegate control to executive managers, their agents. This perspective has had a major impact on debates regarding corporate governance and upon programs of corporate governance reform, especially in the wake of various corporate ‘scandals’. However, through an examination of the nature of the limited liability corporation and, in particular, the position of creditors, this paper argues that the abstract theory of the firm should not be taken to imply that shareholders are the only party whose interests currently count in conventional systems of corporate governance. In this way, the paper seeks to disturb the notion of shareholder primacy, pure and simple, thus opening up possibilities for other analyses of the limited liability corporation; and it also highlights for business ethicists the significance of trade creditors and finance creditors whose interests should be recognized and considered.