Some Skepticism about Increasing Shareholder Power

This Article challenges the claim of shareholder primacists that reapportioning corporate governance power away from boards of directors and toward shareholders will benefit shareholders as a class.This claim is premised upon the assumptions that shareholders have harmonious interests and that they will pursue those interests by disciplining managers and increasing shareholder value.I argue that the pursuit of common shareholder interests is unlikely to dominate the actions of shareholders.The largest modern shareholders-those most likely to exercise shareholder power-have private interests that are both substantial and in conflict with maximizing overall shareholder value.As a result, it is misleading to assume that increasing shareholder power will benefit shareholders generally.Instead, it is more plausible that shareholders will use any incremental power conferred upon them to benefit their private interests at the expense of the firm and other shareholders.I contend that this concern poses a sufficient threat to shareholder wealth to warrant caution before implementing corporate governance reforms that would increase shareholder power.I n the shareholder-power debate over how best to apportion corporate decision making between officers and directors, on the one hand, and shareholders, on the other hand, shareholder primacists are gaining ground.According to shareholderprimacy theory, shareholders of the modern publicly held corporation are principals, and managers are their agents in running the firm.Shareholder primacists contend that shareholders would like managers to maximize the long-term value of their shares, 1 but that managers are unlikely to do so because their interests are insufficiently aligned with those of shareholders.According to shareholder primacists, increasing shareholder power would go a long way toward solving the agency problem between managers and shareholders.2 On the other side of the debate are director primacists-those who argue in favor of vesting primary decision making authority in a firm's board of directors.In Stephen Bainbridge's director-primacy theory, for example, the board of directors is a mechanism for solving the organizational design problem that arises when one views the firm as a[ 3 ] UCLA