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.