Efficiency and Ethics in the Debate about Shareholder Primacy

Abstract

With the rise to dominance of the economic analysis of corporate law, a nearly overwhelming chorus of academic voices has endorsed the view that managers' fiduciary duties require them to maximize the shareholders' wealth and preclude them from giving independent consideration to the interests of other constituencies. This Essay examines two recent theoretical contributions that have called into doubt the normative consensus around shareholder primacy, specifically Margaret Blair and Lynn Stout's team production model, which conceives of the board as a mediating hierarch, and Einer Elhauge's argument that managers must have discretion to sacrifice profits in the public interest. Although Blair, Stout and Elhauge are far from the first scholars to argue against shareholder primacy, their contributions break new ground since they argue within the dominant normative framework, namely economic efficiency. This Essay argues that neither of these efficiency-based attacks on shareholder primacy is successful. In the author's view, the efficiency debate is a draw. This Essay also examines the relevance of morality to the debate about shareholder primacy. Both Blair and Stout and Elhauge introduce, in different ways, conceptions of moral behavior, even though they remain committed to the efficiency framework. The author claims that morality may be relevant to the debate about shareholder primacy in two ways overlooked by Blair, Stout and Elhauge because of their commitment to efficiency. First, morality may be relevant to the evaluative standard. Second, ethical commitments may be a more complicated concept than efficiency theorists typically acknowledge. These observations may help to explain why corporate law does not and should not unqualifiedly endorse shareholder primacy and, in particular, why it does not and should not obligate corporate managers to analyze ethical questions arising in the course of business from the standpoint of profit alone.