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E-MailMarc Moore is Reader in Corporate Law and Director of the Centre for Corporate and Commercial Law (3CL) at the University of Cambridge. This post is based on a recent paper by Dr. Moore. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power by Lucian Bebchuk.
Despite their differences of opinion on other issues, most 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 “shareholder primacy” norm—is so ingrained within mainstream corporate governance thinking that it has traditionally been subjected to little serious policy or even academic question. However, the zeitgeist would appear to be slowly but surely changing. The financial crisis may not quite have proved the watershed moment it was initially heralded as in terms of resetting dominant currents of economic or political opinion. Nonetheless, in the narrower but still important domain of corporate governance thinking and policymaking, the past decade’s events have triggered the onset of what promises to be a potentially major paradigm shift in the direction of an evolving “Post-Shareholder-Value” (or “PSV”) consensus.
On an academic level, this movement is represented by a growing body of influential legal and economic scholarship which contests most of the staple ideological tenets of orthodox corporate governance theory. Amongst the most noteworthy contributions to this literature are Professor Lynn Stout’s influential 2012 book The Shareholder Value Myth (Berret-Koehler), and also Professor Colin Mayer’s excellent 2013 work Firm Commitment: Why the corporation is failing us and how to restore trust in it (Oxford University Press). In particular, proponents of the PSV paradigm typically dismiss the common neo-classical equation of shareholder wealth maximization with economic efficiency in the broader social sense. They also typically eschew individualistic understandings of the firm in terms of its purported internal bargaining dynamics, in favour of alternative conceptual models which celebrate the distinctive value of the corporation’s inherently autonomous corporeal features.
Evidence of a potential drift from the formerly dominant shareholder primacy paradigm in corporate governance is additionally apparent on a practical policy-making level today, not least in the rapid proliferation of Benefit Corporations as a viable and popular alternative legal form to the orthodox for-profit corporation. At the same time, the increasing use by US-listed firms of dual-class voting structures designed to insulate management from outside capital market pressures, coupled with the seemingly greater flexibility afforded to boards over recent years in defending against unwanted takeover bids from so-called corporate “raiders,” both provide additional cause to question the longevity of the shareholder-oriented corporate governance status quo.
But while evolving PSV institutional mechanisms such as Benefit Corporations and dual-class share structures are prima facie encouraging from a social perspective, there is cause for scepticism about their capacity to become anything more than a relatively niche or peripheral feature of the US public corporations landscape. This is principally 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. From a normative point of view, moreover, it is arguable that such measures—irrespective of the extent of their take-up over the coming years—ultimately should remain quasi-contractual and voluntary in nature, as opposed to being placed on any sort of mandatory basis.
In this regard, it should be respected that public corporations are not only the predominant organizational vehicle for conducting large-scale industrial production projects over indefinite time horizons, as academic proponents of the PSV position have vigorously emphasized. Of comparable importance and ingenuity is that fact that—in the United States at least—public corporations are also a necessary structural means of enabling the residual income streams accruing from successful industrial projects to fund the provision of socially essential financial services, via the medium of public capital (and especially equity) markets. Unfortunately, though, these two dimensions of the public corporation are not always mutually compatible. Rather, it would seem that more often than not they are prone to antagonize, rather than complement, one another. This is especially so when it comes to the periodically-vexing managerial question of whether a firm’s residual earnings should be committed internally to the sustenance and development of the productive corporate enterprise itself, or else distributed externally to shareholders in the form of either enhanced dividends or stock buybacks. The problem is that the evolving PSV corporate governance paradigm—as manifested on both an intellectual and policy level today—focuses exclusively on the former of those dimensions at the expense of the latter.
The somewhat uncomfortable truth for many observers is that, for better or worse, the American system of shareholder capitalism, and its pivotal corporate governance principle of shareholder primacy, are ultimately products of our own collective (albeit unintentional) civic design. Accordingly, 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. Until corporate governance scholars and policymakers are capable of coordinating their respective energies towards somehow alleviating US worker-savers’ significant dependence on corporate equity as a source of non-occupational wealth gains, the shareholder-oriented corporation is likely to remain a socially indispensable phenomenon. To those who rue this prospect, it might be retorted “better the devil you know than the devil you don’t.”
The complete paper is available for download here.
