Shareholder Primacy and the Business Judgment Rule: Arguments for Expanded Corporate Democracy

Abstract There is a fundamental flaw in the law's approach to corporate governance. While shareholder primacy is a well-established norm within United States corporate law, the business judgment rule essentially holds directors blameless when they fail to maximize shareholder wealth. During the past century, control of the corporation has shifted from shareholders to managers. As a result, shareholders have little practical say in who runs the corporation, and they cannot usually hold managers legally liable when those managers destroy shareholder wealth through incompetence. Despite a number of arguments asserting that shareholders do not deserve any additional management powers, this article concludes that this flaw in corporate governance compels greater shareholder democracy, primarily through access to the corporate proxy to nominate directors. Introduction There is a fundamental flaw in the law's approach to corporate governance: shareholder primacy is a well-established norm within United States corporate law.1 Put simply, the majority view holds that the principal role of the corporation is to maximize the wealth of its shareholders.2 Within corporations, the locus of power is the board of directors.3 But under the business judgment rule, shareholders are often left with no legal recourse when their directors fail to maximize shareholder wealth.4 Shareholders have only two practical options when directors fail to maximize shareholder wealth: sell their shares5 or remove the directors.6 The first option is of little value if shareholders have already lost a substantial amount of their investment.7 The second option, as discussed in this article, has not been available for most shareholders. But granting shareholders the means to more actively participate in the selection of directors is the most practical option shareholders have to protect their interests. This Article initially examines a corporate governance conundrum arising from the interplay between the shareholder primacy norm and the business judgment rule. First, the history of the shareholder primacy norm is reviewed, demonstrating that it remains a core principle guiding corporate governance. The development of the business judgment rule is then reviewed, concluding with recent applications of the rule establishing it as the standard approach courts take with regard to director liability. The corporate governance conundrum- and flaw - lies in the fact that, due to the business judgment rule, shareholders have minimal legal recourse when directors fail to maximize shareholder wealth. This leads next to an examination of the concept of shareholder democracy - an approach to empower shareholders primarily by allowing them access to the corporate proxy to nominate directors. This part of the article examines the arguments against shareholder democracy and then examines its advantages and counters many of its criticisms. This article then moves beyond most shareholder democracy arguments by returning to the corporate governance conundrum examined earlier to present a case for why the combination of the shareholder primacy doctrine and the business judgment rule provides the strongest argument yet presented for why shareholders should be provided greater democracy.8 I. The Corporate Governance Conundrum A. The Shareholder Primacy Norm Under the shareholder primacy norm, corporate managers should only make decisions for the benefit of those who own shares of the corporation.9 Shareholder primacy is reflected in the axiom that the sole purpose of the corporation is to maximize profits,10 or more specifically that management's objective is to maximize shareholder wealth.11 The foundation of the shareholder primacy norm is the directors' fiduciary duty to make decisions that are in the best interests of the shareholders.12 Shareholder primacy may arguably be traced back to the classic case of Dodge v. …