What They Tell You#
Corporations exist to maximize shareholder value. Shareholders are the owners, and managers are their agents. Any other purpose—serving employees, communities, or society—diverts from the corporation’s true purpose and is a form of theft from shareholders. The stock price is the best measure of corporate performance.
What They Don’t Tell You#
Shareholder primacy is a recent ideology, not a timeless truth. Shareholders don’t really “own” corporations in the way they own personal property. Maximizing shareholder value has led to short-termism, underinvestment, and harm to workers and communities. Other models of corporate governance work well. And even shareholders may be better off without shareholder primacy.
The Origin of Shareholder Primacy#
The doctrine emerged in the 1970s-80s:
Milton Friedman (1970): “The social responsibility of business is to increase its profits.”
Jensen & Meckling (1976): “Agency theory”—managers are agents of shareholders and must maximize shareholder wealth.
Hostile takeovers (1980s): If managers don’t maximize stock price, raiders buy the company and fire them.
But this wasn’t always the view:
In the 1950s-60s, corporations talked about balancing stakeholders
Managers saw themselves as trustees of institutions, not mere agents of shareholders
Long-term thinking was valued over quarterly returns
Do Shareholders Own Corporations?#
Legally, shareholders don’t own the corporation—they own shares, which confer certain rights (voting, dividends). The corporation owns itself.
What shareholders actually get:
The right to vote for the board (mostly rubber-stamping management)
Residual claims on profits (after all other obligations are met)
Limited liability (they can lose only what they invested)
What they don’t get:
The right to control day-to-day operations
Access to corporate assets
The right to direct employees
This is quite different from owning a house or a car.
The Consequences of Shareholder Primacy#
Short-termism: Pressure to boost quarterly earnings leads to underinvestment in R&D, training, and long-term projects.
Stock buybacks: Companies spend billions buying their own stock to boost prices rather than investing in workers or innovation. Buybacks were largely illegal until 1982.
Wage suppression: Labor is treated as a cost to minimize, not a resource to invest in.
Inequality: Gains go disproportionately to shareholders (mostly the wealthy) rather than workers.
Boom and bust: Pressure to take risks for short-term gains contributes to financial instability.
Alternative Models#
German codetermination: Workers elect half the supervisory board in large companies. Companies must consider employee interests.
Japanese stakeholderism: Corporations are seen as communities of employees, with shareholders as one stakeholder among many.
B-Corps: Certified to meet social and environmental standards, with legal protection to consider stakeholders.
Cooperatives: Owned by workers, customers, or communities rather than investors.
Benefit corporations: Legal structures that require consideration of all stakeholders.
These models are not fringe experiments—Germany and Japan are among the world’s most successful economies.
The Business Case Against Shareholder Primacy#
Even on business terms, the doctrine may be counterproductive:
Talent: Workers prefer companies with broader purposes
Innovation: Long-term R&D requires patient capital
Reputation: Companies known for treating stakeholders well build valuable brands
Sustainability: Short-term profit extraction destroys long-term value
Studies show that stakeholder-oriented companies often outperform shareholder-focused ones over the long term.
The Legal Reality#
Despite the ideology:
No legal requirement: In most jurisdictions, there’s no legal duty to maximize shareholder value. Delaware law requires pursuing the “best interests of the corporation”—which can include stakeholders.
Business judgment rule: Courts generally defer to management decisions, even if they don’t maximize short-term shareholder value.
B-Corp and benefit corporation laws: Allow explicit commitment to multiple stakeholders.
The legal foundation of shareholder primacy is weaker than its proponents claim.
Why It Persists#
If shareholder primacy is neither legally required nor economically optimal, why does it dominate?
Ideology: It’s taught in every business school and economics department.
Incentives: Executive compensation tied to stock price aligns managers with shareholder interests.
Power: Shareholders (especially institutional investors) have mobilized; other stakeholders have not.
Simplicity: “Maximize one number” is easier than balancing multiple stakeholders.
What Would Change Look Like?#
Corporate governance reform: Worker voice on boards, stakeholder advisory councils
Executive compensation: Tied to long-term and broader metrics
Institutional investor accountability: Pension funds and mutual funds voting for long-term interests
Legal reform: Stakeholder consideration requirements
New corporate forms: More B-Corps, cooperatives, and social enterprises
The Bottom Line#
Shareholder primacy is a choice, not a necessity. We had different corporate governance before and can have different governance again.
The question is who corporations serve: a narrow slice of financial claimants, or the broader community of people who make them work and are affected by their operations. There’s nothing natural or inevitable about the answer.
