Shareholder primacy
{{Short description|Concept in corporate governance}}
{{Globalize|article|United States|date=May 2022}}
Shareholder primacy is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other stakeholders. A shareholder primacy approach often gives shareholders power to intercede directly and frequently in corporate decision-making, through such means as unilateral shareholder power to amend corporate charters, shareholder referendums on business decisions and regular corporate board election contests.{{Cite journal |title=Professor Bebchuk's Brave New World: A Reply to 'The Myth of the Shareholder Franchise'|author=John F. Olson|journal=Virginia Law Review|volume=93|number=3|date=May 2007|pages=773–787|jstor=25050360}} The shareholder primacy norm was first used by courts to resolve disputes among majority and minority shareholders, and, over time, this use of the shareholder primacy norm evolved into the modern doctrine of minority shareholder oppression.{{Cite journal |last=Smith |first=D. Gordon|title=The Shareholder Primacy Norm|journal=Journal of Corporation Law|volume=23|number=2|date=Winter 1998|ssrn=10571|doi=10.2139/ssrn.10571|url=https://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?article=1027&context=faculty_scholarship }}
James Kee wrote in 1995 for the right-wing libertarian Mises Institute think tank, "If private property were truly respected, shareholder interest would be the primary, or even better, the sole purpose, of the corporation."{{citation |author=James Kee |title=The Ethical Corporation? |date=May 1995 |volume=13 |number=5 |url=https://mises.org/library/ethical-corporation |publisher=The Free Market}}. However, the doctrine of shareholder primacy has been criticized for being at odds with corporate social responsibility and other legal obligations.{{citation |author=Gordon Pearson |title=The truth about shareholder primacy |date=25 May 2012 |newspaper=The Guardian |url=https://www.theguardian.com/sustainable-business/short-termism-shareholder-long-term-leadership}}.
Background
Shareholder primacy was first articulated in the decision of Dodge v. Ford Motor Co. in 1919.{{cite court|vol=204|reporter=Mich|opinion=459|court=Mich|date=1919|url=https://cite.case.law/mich/204/459/}} In the Michigan Supreme Court's opinion, it stated that "There should be no confusion... A business corporation is organized and carried on primarily for the profit of the stockholders." It is commonly asserted that the case established a precedent that managers had to maximize shareholder profit, but the status of the court's statement on the topic is disputed, with some legal scholars arguing that it constitutes obiter dicta, or judicial comments that lack binding force.{{Cite journal |last=Stout |first=Lynn A. |date=2007 |title=Why We Should Stop Teaching Dodge v. Ford |url=http://www.ssrn.com/abstract=1013744 |journal=SSRN Electronic Journal |language=en |doi=10.2139/ssrn.1013744 |issn=1556-5068}}
In their 1932 publication on foundations of United States corporate law and governance—The Modern Corporation and Private Property{{cite book |title=The Modern Corporation and Private Property|first1=Adolf |last1=Berle |first2=Gardiner |last2=Means |publisher=Transaction Publishers |date=1932 | pages= 380 | isbn= 0-88738-887-6 | oclc= 258284924 |url=https://archive.org/details/in.ernet.dli.2015.216028 }}—Adolf Berle and Gardiner Means's introduced the idea that "shareholders are the corporation's 'true owners'."{{Cite magazine |last=Palladino |first=Lenore |date=October 1, 2019 |title=The Modern Corporation and Private Property The American Corporation Is in Crisis—Let's Rethink It |url=https://bostonreview.net/forum/lenore-palladino-american-corporation-crisis%E2%80%94lets-rethink-it |magazine=Boston Review |access-date=October 29, 2019}}
In his 1962 book, Capitalism and Freedom, the economist Milton Friedman advanced the theory of shareholder primacy which says that "corporations have no higher purpose than maximizing profits for their shareholders." Friedman said that if corporations were to accept anything but making money for their stockholders as their primary purpose, it would "thoroughly undermine the very foundation of our free society." His article, "A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits", was published September 13, 1970, in The New York Times:{{Cite news |last=Friedman |first=Milton |date=September 13, 1970 |title=A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits |url=https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html |work=The New York Times |issn=0362-4331 |access-date=October 29, 2019}}
{{blockquote|In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires ... the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation ... and his primary responsibility is to them.|Milton Friedman. "A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits". The New York Times. September 13, 1970.}}
Economist Michael C. Jensen, a former student of Friedman at the University of Chicago, is also widely credited with helping to popularize the idea of shareholder primacy.{{Cite news |last=Useem |first=Jerry |date=2019-07-22 |title=The Stock-Buyback Swindle |url=https://www.theatlantic.com/magazine/archive/2019/08/the-stock-buyback-swindle/592774/ |url-status=live |archive-url=https://web.archive.org/web/20190722134634/https://www.theatlantic.com/magazine/archive/2019/08/the-stock-buyback-swindle/592774/ |archive-date=2019-07-22 |access-date=2024-07-01 |work=The Atlantic |language=en |issn=2151-9463}}{{Cite web |last=Tong |first=Scott |date=2016-06-14 |title=How shareholders jumped to first in line for profits |url=https://www.marketplace.org/2016/06/14/profit-shareholder-value/ |url-status=live |archive-url=https://web.archive.org/web/20190728172901/https://www.marketplace.org/2016/06/14/profit-shareholder-value/ |archive-date=2019-07-28 |access-date=2024-07-01 |website=Marketplace |language=en-US}}
The doctrine waned in later years. In March 2009, Jack Welch, known for promoting shareholder primacy during his tenure as CEO of GE,{{Cite web |last=Tong |first=Scott |date=2020-03-03 |title=Jack Welch's legacy: serving shareholders |url=https://www.marketplace.org/2020/03/02/jack-welchs-legacy-value-for-shareholders-but-not-necessarily-for-workers/ |url-status=live |archive-url=https://web.archive.org/web/20200304070237/https://www.marketplace.org/2020/03/02/jack-welchs-legacy-value-for-shareholders-but-not-necessarily-for-workers/ |archive-date=2020-03-04 |access-date=2024-07-01 |website=Marketplace |language=en-US}} stated in an interview with the Financial Times, "On the face of it, shareholder value is the dumbest idea in the world."{{Cite news |date=2009-03-16 |title=Jack Welch Elaborates: Shareholder Value |url=https://www.bloomberg.com/news/articles/2009-03-16/jack-welch-elaborates-shareholder-value |url-status=live |archive-url=https://web.archive.org/web/20201104210852/https://www.bloomberg.com/news/articles/2009-03-16/jack-welch-elaborates-shareholder-value |archive-date=2020-11-04 |access-date=2024-07-01 |work=Bloomberg News}} In August 2019, the Business Roundtable published its alternative view, focused on long-term benefits for a broad range of "stakeholders."{{cite journal |last1=Posner |first1=Cydney |title=So Long to Shareholder Primacy |journal=Harvard Law School Forum on Corporate Governance |date=August 22, 2019}}{{Cite news |last=Wartzman |first=Rick |date=2019-08-19 |title=America’s top CEOs say they are no longer putting shareholders before everyone else |url=https://www.fastcompany.com/90391743/top-ceo-group-business-roundtable-drops-shareholder-primacy |url-status=live |archive-url=https://web.archive.org/web/20190819200539/https://www.fastcompany.com/90391743/top-ceo-group-business-roundtable-drops-shareholder-primacy |archive-date=2019-08-19 |access-date=2024-07-01 |work=Fast Company}}