More importantly, who cares?

Before we demolish the idea, let’s explain it a bit.

Shareholder primacy means that in corporate affairs, executives manage the business principally for benefit of shareholders. The main purpose of the company, then, becomes to create value for investors.

Seems obvious to us investors. But, for decades, scholars and practitioners have debated the purpose of a corporation:

1. ❖make money for investors?
   

2. ❖serve employees or customers?
   

3. ❖benefit the community and society?
   

In some recent accounts, the debate has boiled down to the difference between “shareholders” and “stakeholders”.

One current version of this debate extends to what, exactly, corporate law demands of executives and directors. More specifically, does corporate law require them to maximize investor value? Does it create a formal duty to increase a public company’s share price?

We think the question doesn’t really matter.

Why Corporations?

Some observers maintain that corporations need to serve their community, and society overall. Although it’s at best difficult to discern her precise reasoning, we include law professor Lynn Stout here. She and others think that since society creates the environment that allows corporations to operate and prosper, corporations must repay society. They should follow sustainable business practices, divest from disagreeable countries, and pay generous wages that exceed market rates in a given jurisdiction.

Others maintain that corporations should follow only the wishes of the BoD. We include law professor Stephen Bainbridge here. In contrast with shareholder primacy, they advocate director primacy. Notably, these observers don’t really guide directors as to what goals the company should pursue.

We think that the sole purpose of the corporation is to create value for investors. We make this point in our critique of socially-responsible investing.

What Duties?

Any BoD that finished basic training no doubt learned the twin duties of directors, of care and loyalty. Care means that directors must follow a proper process in making decisions that concern the corporation. Loyalty means that directors must place the interests of the corporation above their own.

When we first read Stout’s book and Bainbridge’s work, we thought they disagree with each other. A complete comparative analysis goes way beyond the space and energy we have here (and gives both of them way more attention then they deserve). They do agree on at least one fundamental position: both think corporate law does not impose an additional duty on directors to maximize the value of the corporation.

Why would they (or anyone) think such a duty might possibly exist? We don’t know of any prominent scholar that argues that it does, although we confess we haven’t looked very hard. The argument that directors have a “duty to maximize value” does produce a convenient and attractive straw man. If Stout and Bainbridge (and others) can show no such duty exists, it allows them to argue that executives and directors can do anything they want. Bainbridge can leave it to the whims of the BoD, while Stout can let executives favor one or another pet cause.

Who Cares?

Stout, Bainbridge, and others do argue persuasively that corporate law imposes no such duty. A recent academic paper, Radical Shareholder Primacy, summarizes the thinking well.

Sure, litigious shareholders might like another cause of action, say “breach of duty of value maximization.” This could form the basis for lawsuits against CEOs and BoDs that stray from some sort of value-maximizing behavior. We don’t know how to show that a CEO or BoD breached that duty, what evidence we would cite.

We think everyone is wasting their time. It doesn’t matter to investors whether corporate law imposes a duty to maximize value. Conscientious shareholders will do it naturally, without common or statutory law. A free, open market for corporate control will create the setting in which current executives and directors maximize company value. Otherwise, investors will find executives and directors that will.