Director v. Shareholder Primacy in the Convergence Debate

Abstract

Although the question of whether international corporate governance is converging on the U.S. model remains contested, there is general agreement as to the nature of that U.S. model. Specifically, virtually all participants in the convergence debate assume that U.S. corporate law is based on a norm of shareholder primacy. This assumption is wrong. U.S. corporate law is far more accurately described as a system of director primacy than one of shareholder primacy. In this essay, the author argues that the comparative corporate governance literature's erroneous understanding of the U.S. model distorts both the positive and normative aspects of the convergence debate. On the positive side, if we use the extent of shareholder primacy as our metric, we end up with a distorted estimate of the extent to which systems have converged. On the normative side, corporate governance is a potentially important instrument by which to increase the economy's efficiency. In recent years, elite U.S. corporate law scholars have played a significant role in reforming the corporate laws of transition economies. If the goal is to export the U.S. model, on the assumption of its superiority, we do those economies no good - and may do much harm - by exporting the wrong model. Hence, we are constrained to examine the normative question: Does it matter? Is director primacy superior to shareholder primacy? This essay acknowledges that investor participation in corporate governance has economic benefits, but argues that director primacy is preferable on balance.