Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy

Abstract

The shareholder primacy norm defines the objective of the corporation as maximization of shareholder wealth. Law and economics scholars have incorporated the shareholder primacy norm into their empirical analyses of regulatory efficiency. An increasingly influential body of scholarship uses empirical methodology to evaluate legal rules that allocate power within the corporation. By embracing the shareholder primacy norm, empirical scholars offer normative assessments about regulatory choices based on the effect of legal rules on measures of shareholder value such as stock price, net profits and Tobins Q.This Article challenges the foundations of using the shareholder primacy norm to judge corporate law. As the Article explains, existing legal doctrine and economic theory provide only limited support for shareholder primacy. Similarly, shareholder primacy cannot be justified as a necessary consequence of existing limits on the enforcement of management fiduciary duties. The Article demonstrates that, rather than defining the corporation's objectives, the limited scope of a fiduciary duty claim provides a mechanism for institutional specialization in responding to the needs of different corporate stakeholders. Comparative institutional analysis suggests that the courts are uniquely positioned to protect the interests of shareholders in the context of inter-stakeholder conflicts. Implementation of this role through rules that grant shareholders a unique degree of judicial access does not privilege the interests of shareholders in the evaluation of firm value.The presence of other stakeholders, whose interests in the firm may be not reflected in an assessment of shareholder value, offers reasons to question the conclusions of existing empirical research. In addition, the measures of shareholder value typically employed by empirical scholars - particularly short term stock price - are problematic as indications of firm value and may reinforce inappropriate managerial decisions. The Article maintains that empirical scholars need to offer better and explicit justifications for their reliance on shareholder wealth and, more importantly, for their argument that shareholder wealth effects should dominate regulatory policy.