Radical Shareholder Primacy

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.