Shareholder Primacy and the Distribution of Wealth
| DOI | http://doi.org/10.1111/j.1468-2230.2005.00528.x |
| Date | 01 January 2005 |
| Published date | 01 January 2005 |
| Author | Paddy Ireland |
Shareholder Primacy and the Distribution of Wealth
Paddy Irela nd
n
In recent years a growingconse nsus has emergedin favour of the shareholder-oriented model of
the corporation. Increasingly, this model is justi¢ed not on the basis of shareholder ownership
rights but on e⁄ciency grounds: whoever the immediate and direct bene¢ciaries of shareholder-
orientation, it is argued,it ultimately indirectly bene¢ts everyone by ensuring the maximization of
aggregate social wealth. The prevalence of this view has caused the distributional dimensions of
corporate governance to be neglected.This paper examines the distribution of share ownership
and ¢nancial wealth in the US and the UK. Although share ownership has become more widely
spread, it argues,it remains very heavily concentratedwith the result that shareholder primacy is
in reality the primacy of a small privileged elite. After an exploration of the contradictions of
working class shareholding and the impact of greater shareholder-orientation on the distribution
of wealth, the paper concludes by re-evaluating Hansmann and Kraakman’s ‘end of corporate
history’ thesis, arguing that recent developments represent a triumph not for e⁄ciency but for
the growing powerof the shareholder class.
Many academics and policymakers now seem tobelieve that the big issues in the
debates about corporate governancehave been resolved.
1
A‘broad normative con-
sensus’ has emerged among the ‘academic, business and governmental elites in
leading jurisdictions’, argue Henry Hansmann and Reinier Kraakman, that ‘ulti-
mate control over the corporation should rest with the shareholder class’ and that
managers should manage in its interests. Indeed, such is the degree of harmony,
there is ‘no longer any serious competitor to the view that corporate law should
principally strive to increase long-term shareholder value’. As equity markets
develop, the‘ideological and competitive attractions’ of the shareholder-oriented
model of thecorporationwill become‘indisputable,even among legalacademics’
and the goal of shareholder primacy will become ‘second nature even to politi-
cians’. Its triumph is thus ‘assured’ and convergence in ‘most aspects of the law
and practice of corporate governance’inevitable.
2
One does not have to endorse Hans mann and Kraakman’s more extravagant
claims about the ‘end of corporate history’ to recognise that there does indeed
seem to be a growing consensus in favour of the shareholder-oriented corpora-
tion.
3
Even those who press the case for stakeholding now tend to do so on the
grounds that it would best serve the long-term interests of shareholders, hence
Sanjat Bhagat and Roberta Romano’s assertion that ‘the participants in corporate
n
Law School, Universityof Kent. My grateful thanks to Joanne Conaghan for her comments and to
James Banks forchecki ng mypresentation of the empirical data on wealth distribution.
1 ‘Corporate governance’ refers to the processes whereby large publicly quoted corporations are
directed and controlled.This article is concerned with shareholderprimacy in these corporations.
2 H. Hansmann and R. Kraakman,‘The End of History for CorporateLaw’ (2001) 89 Georgetown
LJ 439,439 ^441.
3 See, forexample, J. Armour,S. Deakin and S. Konzelmann,‘ShareholderPrimacy and the Trajec-
tory of UK Corporate Governance’ (2003) 41 BritishJournalof IndustrialRelations531.
rThe Modern LawReview Limited 2005
Published by BlackwellPublishing, 9600 Garsington Road,Oxford OX4 2DQ,UK and 350 Main Street, Malden, MA 02148, USA
(2005) 6 8(1) MLR 49^81
law debates share the objective of corporate law ^ to adopt policies that enhance
shareholder wealth’, and disagree only ‘over the means to achieve that end’.
Paradoxically, however, as the shareholder primacy norm has gained in strength,
the rationale for it has become rather blurred. Sometimes it is defended simply on
the basis of shareholder corporate ‘ownership’. For Bhagat and Romano, for
example, the goal of corporate law is to‘further the interests of the owners of the
¢rm’ and ‘the benchmark for evaluating the bene¢t of corporate and securities
laws is whether they improve investor welfare’.
4
It is now incre asingly common,
however, for the support for shareholder pri macy tob e couched in the more neu-
tral and consequentialist language of ‘e⁄ciency’. Indeed, it was on this basis that
the recent Company Law Review rejected a‘pluralist’model of the corporation in
favour of one based on ‘enlightened shareholder value’.
5
In similar vein, Joseph
McCaheryand Luc Renneboog have recently written of the debates about ‘how
to design an e¡ective corporate governance system that promotes economic e⁄-
ciency’, something which just happens to be more or less synonymous with
promoting a system which ‘ensure[s] . . . management pursues the welfare of
shareholders’and ‘maximis[es] the returns to investors’.
6
The growing supportfor shareholderprimacy is not con¢ned to jurisidictions,
like the United States and the United Kingdom, noted for their stock market
based, shareholder-focused corporate governance regimes and relatively red-
blooded versions of capitalism. As the Company Law Review acknowledged,
shareholder primacy is gaining ground in the traditionally more socially demo-
cratic and stakeholder-friendly countries of Continental Europe.
7
Thus, the lead-
ing European corporate lawyer, Klaus Hopt, while carefully avoiding direct
discussion of thealleged ‘end of corporate history’, recently wrote of the‘probably
irreversible’,‘market-driven’,‘coming together of Anglo-Saxon and Continental
law’.
8
And at the international level, the OECD and theWorld Bank have been
vigorously promoting the virtues of American-style, shareholder-oriented cor-
porations.
9
The World Bank frankly admits that its activities in this ¢eld ‘focus
on the rights of shareholders’
10
and the OECD’s recently revised Principle s of Cor-
porate Governance are ¢rmly shareholder-oriented, notwithstanding allusions to
4 S.Bhagat and R. Romano,‘Event Studies and the Law: Part II’(2002) 4 American Lawa nd Econom-
ics Review380.
5 See CLR Steering Group, Modern Company Law: Developing the Framework, paras 2.7^2.26. For
some, the e⁄ciency rationalecreates room for a morei nclusive approach to shareholderprimacy
which takes account of the interests of other stakeholders in the long-term interest of share-
holders.
6 J. McCahery and L. Renneboog, ‘Introduction’ to McCahery et al (eds), Corporate Governance
Regimes (Oxford: OUP,20 02),1.
7 The Reviewnoted the movement on the continent‘awayfrom more comprehensivestakeholder
views of the company’and the‘growingrecognition of the need to respond to the capital markets,
including in particular the pension funds, which are . . . becomi ng a growing force worldwide’:
see n 6 above, para3.34.
8 K. Hopt,‘CommonPrinciples of Corporate Governance in Europe’, in McCahery et al (eds),n 6
above,175 at 176, noting that German capital markets a nd stock exchanges are growing and under-
going fundamental, internationally driven changes.
9 See OECD,Experiences from the RegionalCorporate Governance Roundtables (2003).
10 Wo r l d Ba n k , About Corporate Governance, http://worldbank.org/html/fpd/privatesector/cg/ (last
visited 10 April 2004).
Shareholder Primacy
50 rThe Modern LawReview Limited 2005
the importance of fostering wealth-creating co-operation among stakeholders.
11
The evidence supporting the claim that we are currently witnessing a ‘conver-
gence on the standard shareholder-oriented model as a normativevi ew ofcorpo-
rate structure and governance’ is, then, plentiful.
12
Although at times rather passionless a¡airs in which political argument is out-
weighed by technical discussion, the debates which have emerged from this are
seemingly rooted in real-world issues, focusing on nitty-gritty things such as
directors’ remuneration, minority shareholder protection, accounting standards,
disclosure and take-over regulation.There is, however, one respect in which, for
all their apparent practicality, they are determinedly unconcerned with empirical
reality. One of their most striking, if little commented upon, features is their
almost complete lack of interest in the identity of the shareholders who directly
bene¢t fromthe shareholder primacy norm. Inthese debates,‘the shareholder’is a
curiouslyabstract ¢gure, the company law equivalent of the liberal individual or
homo economicus. Beyond a few references to the widening of share ownership
and hints that ‘we’re all (more or less) shareholders now’, little if any energy is
expended exploring the distribution of share ownership or the composition and
character of Hansmann and Kraakman’s ‘shareholder class’. As one commentator
says, the actual owners of shares are, apparently,‘irrelevant to corporate law’.
13
This lack of interest in the make-up of the shareholder class £ows in part from
the fact that it is not supposed to matter who precisely the shareholders of these
corporations are.If it is claimed that shareholders ‘own’corporations, for example,
it is usually inferred that theyare entitled to have them run in their interests as of
right, whoever they happen to be, whatever the consequences. If, on the other
hand, the highly problematic claim of shareholdercorporate‘ownership’ is diluted
or abandoned,
14
shareholder primacy i s still defended ^ whoever the sharehold ers
are ^ on the grounds that it promotes‘e⁄ciency’and the maximisation of aggre-
gate wealth for the bene¢t of society as a whole. In the US this is re£ected in the
frequent use of ‘wealth maximisation norm’ as a synonym for ‘shareholder pri-
macy norm’. Indeed, in recent years, notwithstanding continuing hints about
the rights of shareholders as ‘owners’,
15
this latter claim has become the main
11 Boardsof directors are not only deemed accountable to shareholders but have‘aduty to act in their
best interests’:OECD, Principlesof CorporateGovernance(January 2004),An notations,sectionV.The
preamble stresses thatcorporate governance is‘one keyelement in improving economic e⁄ciency
and growth aswell as protecting private savings’and argues that one of the ‘keydrivers’for public
policy involvement in corporate governance ‘has been concern about the preservation of private
savings for retirement’.‘Good corporate governance’,‘an increasingly important factor in invest-
ment decisions’, needs to ‘provide proper incentive s for the board and management to pursue
objectivesthat are in the interests of the company and shareholders’, 2^3.
12 Hansmann and Kraakman, n 2 above,443.
13 D.Greenwood,‘Fictional Shareholders:For Whom is the CorporationManaged?’ (1996)69 South-
ern California Law Review 1021,1026,1032.
14 See P. Ireland,‘CompanyLaw and the Myth of Shareholder Ownership’ (1999) 62MLR 32.
15 As Margaret Blair observes,the rhetoric of ‘ownership’ is even utilized by pro-shareholder advo-
cates of the nexus-of-contracts model of the corporation, whose arguments implythat there is no
‘corporation’ to be owned, to add moral weight to their arguments: see M. Blair,‘Shareholder
Value, Corporate Governance, and Corporate Performance’ in P. Cornelius and B. Kogut (eds),
CorporateGovernancea nd CapitalFlows in a Global Economy (Oxford: OUP, 2003).
Paddy Ireland
51rThe Modern LawReview Limited 2005
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