Monitoring and Regulating Industries and Organizations
Chapter 2: Governing the corporation: the economic theory roots of the shareholder primacy doctrine
Chapter 2 examines the components of the shareholder primacy governance model that has dominated corporate governance scholarship since the early 1980s. Tracing the roots of the economic theory that justifies shareholder governance to the cold war era and what has been called cold war rationality, the chapter stresses how rational choice theory has informed corporate governance through, e.g., agency theory and other economic theories stipulating instrumental rationality as a privileged analytical model. The cold war heritage has been criticized for overstating experimental data and for ignoring rational responses from experimental subjects, resulting in an overtly negative view of human decision making capacities. When transferring such analytical models to, e.g., corporate governance affairs, salaried managers, e.g., are at risk of being portrayed in unfavourable ways to justify the market for management control, in turn resulting in shareholder primacy governance. The chapter concludes that the efficiency criterion that economic theory stipulates is too one-dimensional to serve its purpose and calls for novel analytical models to better assist corporate governance activities.
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