Edited by P. M. Vasudev and Susan Watson
Chapter 1: New Thinking on ‘Shareholder Primacy’
1. New thinking on ‘shareholder primacy’ Lynn A. Stout INTRODUCTION: THE RISE OF SHAREHOLDER PRIMACY THINKING Of all the controversies in US corporate law, one has proven most fundamental and enduring. This is, of course, the debate over the proper purpose of the public corporation (Bratton and Wachter 2008, pp. 100– 103).1 Should a public company seek only to maximize the wealth of its shareholders (the so-called ‘shareholder primacy’ view)? Or should public corporations be run in a manner that considers the interests of other corporate ‘stakeholders’ as well, including employees, consumers, even the larger society? The Great Debate, as it has been characterized by two sitting and one former member of the Delaware judiciary (Allen, Jacobs and Strine 2002, p. 1067), dates back at least to the initial emergence of the public corporation as a powerful business form in the early twentieth century.2 For several decades afterwards, the two sides in the controversy seemed evenly matched. Neither the champions of shareholder primacy, nor the defenders of stakeholder interests, enjoyed the upper hand. This changed in the 1970s with the rise of the ‘Chicago School’ of economists. Prominent members of the School argued that economic analysis could reveal the proper goal of corporate governance quite clearly and that goal was to make shareholders as wealthy as possible. Thus Nobelprize winner Milton Friedman (1970) argued in the pages of the New York Times Sunday magazine that because shareholders ‘own’ the corporation, the only ‘social responsibility of business is to increase...
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