Should Someone Who Believes in Economic Laissez-Faire Also Believe in Shareholder Primacy?

29 01 2020

In recent weeks, I’ve observed a curious pattern in the debates in the academic world about corporate purpose: I’ve noticed that some libertarian authors assume that shareholder primacy is the position in the debate on corporate purpose that someone who believes in deregulation, a smaller state, etc should favour. In this blog post, I would like to question this unexamined assumption, doing so by drawing on my knowledge of the history of corporate governance (I’ve published a bit in this area and on the evolution of our ideas about corporate purpose).


Here is some context: in recent years, a debate about corporate purpose has raged. Is the purpose of a (business) corporation simply to maximize the profits that can be distributed back to the stockholders? Or should managers balance the interests of shareholders against those of other stakeholders, such as workers? The latter normative view, the stakeholder theory, was recently endorsed by the Business Roundtable, a group of US CEOs.


In a recent blog post, Alberto Mingardi, a libertarian academic in Italy, recently critiqued stakeholder theory on the grounds that it is (somehow) incompatible with limited government and free-markets. I know that Mingardi, who is an Assistant Professor in History of Political Thought at IULM University of Milan, is a smart guy. However, I would encourage him to rethink his assumption that stakeholder theory is incompatible with his political commitments. In fact, if you want to avoid a world in which the state subjects private firms to mass of bureaucratic regulations, you should probably want managers to absorb the norm that they should not maximize shareholders’ profits whenever it is legal to do so. If policymakers believe that managers will exploit every last opportunity to maximize profits for shareholders whenever doing so isn’t illegal, they are more likely to impose lots of regulations on companies than if they hear managers say that they will take the interests of non-shareholder stakeholders into account.

Mingardi wrote:

As [are] most libertarians, I’m not a fan of the word “stakeholder”. To my eyes, it seems to be a shortcut for a corporatist economy. By contrasting shareholders and stakeholders, some authors seem to point in the direction of a muddled kind of capitalism, one in which businesses – rather than caring for the interests of those who actually own them – are supposed to picture themselves as doing the interests of all people somewhat concerned with their activities. Sure enough, entrepreneurs need not a “social conscience” to care about their workers and their suppliers. Their self-interest would suffice: happy employees are likely to be more productive, and if you don’t treat your suppliers decently you do so at your own risk. But stakeholder capitalism, as it is somehow called, aims at being a capitalism in which profits are deemed to be a second-order concern. There are some activities in life that cannot be managed under the profit motive (I think of a large chunk of the nonprofit sector, that does indeed do valuable things), but in the case of businesses, the refusal of taking profits into consideration could easily become a cover-up for inefficiency – if not for a conflict of interest altogether.



In associating shareholder primacy with the free market and stakeholder theory with the opposite of the free market, Dr Mingardi appears to be overlooking the management research has demonstrated that entrepreneurs establish firms for a range of reasons. In some cases, perhaps a minority, the motivation is purely to maximize the ROI of the investors who put capital in the enterprise. In other cases, the founders of firms are trying to achieve a bunch of different objectives, such as the maximization of the owners’ socio-emotional wealth (SEW) or some other non-economic objective.  For many firms, especially family firms, the interests of the shareholder are not paramount. Consider the cases of Hobby Lobby, a Christian-run firm in the US that was savaged in the media because of company policies that many secular people regard as unacceptable.  Hobby Lobby clearly isn’t a firm that is managed so as to maximize shareholder value. I can think of other organizations that fall into our category of “for-profit company” and which do things that cost a lot of money but which reflect the values of the founders. The Body Shop, which is loved by some of my New Age, animal rights friends, is such a firm.


I would suggest that in a free country, the state should, in general, be neutral on issues of corporate purpose just as it is neutral on issues of religion or whether citizens keep kosher, eat vegan, or adopt some other type of values-based diet. We should accept that in large population of firms, some will indeed be managed according the principle of shareholder primacy but that there were will also be firms with a range of other goals as well. Some of these firms will behave in ways that appear to straddle the category between for-profit firm and charity and that’s ok too, since the Western distinction between firms and charitable foundations isn’t a naturally occurring one that we need to accept uncritically.

As long as firms aren’t defrauding investors or otherwise breaking the law, the government ought to be cool with firms having different views of corporate purpose. Let a thousand flowers bloom in terms of corporate purpose. Forcing organizations to select just one purpose (e.g. maximizing profits for the shareholders OR a charitable goal) from a very limited menu seems illiberal to me. I suppose the decision of policymakers in some US states to give their blessing to a new organizational firm, the B Corporation, is a move in the right direction, but we are still in a world in which the state forces organizations to make choices from a limited menu that is written by the state, for the most part. That’s why definitions of corporate purpose vary so dramatically from one jurisdiction to the next, even within Europe.

In recent decades, the prevailing conception of corporate purpose, at least in the United States and some other English-speaking jurisdictions, has been the shareholder wealth maximization norm. There is a lot of evidence that managers see the maximizing shareholder value as the essential purpose of the company,  there are baneful consequences for workers, local community, and R&D spending. Even Jack Welch has called shareholder primacy the dumbest idea in the world. He’s no liberal.

It is not widely appreciated that the organs of the state, particularly, the SEC and the courts, have played a major role in promoting the idea that a manager’s core duty is to maximize the wealth of the stockholders.  This doctrine didn’t become dominant in the English-speaking countries naturally.  As Professor Stephen Bainbridge observes “The shareholder wealth maximization norm, pursuant to which directors are obliged to make a decision based solely on the basis of longterm shareholder gain. This principle is well-established in U.S. corporate law”

If you think that the government should be neutral on the question of corporate purpose, the fact the state in the US and other English-speaking countries are so biased towards the shareholder primacy norm is a problem.  Another problem I see with the existing law governing organizations is that they force organizations to make a hard choice between being in the non-profit category by incorporating as a non-profit or incorporating a profit-seeking company. The SEC, the IRS, etc they all operate on a black-and-white system of categories that doesn’t really accommodate intermediate forms with mixed corporate purposes. You are either in one category or another. I suppose the creation, with the approval of the state, of the Benefit Corporation is an improvement as it puts another choice on the menu of organizational forms, but ultimately the government is forcing organizations into categories. I think the consequences of that forcing, which now include shareholder primacy, can be pernicious.

For several generations, the US government has been telling US firms to maximize shareholder value.  One of the unintended consequences the creation of the SEC in the 1930s is that the Commission later began telling managers to put the interests of shareholders first.  Elizabeth Warren has recently proposed using the SEC to force US executives to abandon shareholder primacy. I would point out that the SEC played a crucial role in the revival of that doctrine in the 1970s and 1980s.

I’m reminded of the Simpsons episode in which alcohol is proclaimed to be “the cause of, and solution to, all of life’s problems.” My sense is that when future historians of corporate governance look back at the SEC’s role in changing how Americans conceptualize corporate purpose, they might come to similar conclusions.






2 responses

29 01 2020
Jonathan J. Weisman (@JJWeisman)

Andrew, the influence of the state’s legal institutions is definitely there, but there are certain practical purposes for that. When assessing the performance of a corporate entity’s managers, it must be done by reference to some range of “reasonable” choices. It seems eminently sensible to conclude that, setting aside those choices which would be unlawful or tortious, reasonable choices must be those which promote the corporate entity’s purpose. The problem is where to look for that purpose and how to determine it (semi) objectively.

If I agree that shareholder profit is too narrow a viewpoint, would you accept that shareholder “interests” would be an acceptable place to look? Isn’t the body of people who literally create and own the entity the right group to look to in order to determine that entity’s purpose?

It may be that there is a point to be made for shareholder primacy over an expanded notion of stakeholders, even if that does not result in the primacy of net profits. After all, there can be Christians for whom the ideology of Hobby Lobby is unacceptable.

18 02 2020

I just saw your excellent comment now JW. I’m not entirely certain that we can say that shareholders create a firm, although the capital they supply is clearly important. In fact, to say that they have created it overlooks the blood sweat and tears that entrepreneurial firm founders sometimes put into launch their companies, long before there is an IPO and the shareholders put some money in. In such cases, it would would seem to be fair for the interests of the managers/corporate founders to get a bit more attention that those of the shareholders that current legal doctrines regard as having primacy in every last case. Here’s the thing, elaborate corporate governance rules established by governments tend to be inflexible and to obscure the diversity of motives that people (managers, workers, and shareholders) have for participating in companies. I think that the law’s role in each firm’s debate about corporate purpose should be minimal so as to allow local experimentation.

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