The Economic Argument for Stakeholder Corporations

Abstract

The mainstream economic theory of the corporation is written to fit within the neoliberal framework of perfectly efficient markets. The entity itself — the corporation — is hypothesized as simply a site for freely negotiated contracts between rational actors, and the privileges granted to the corporation by public power are erased. As all negotiations between rational actors lead to efficient outcomes, the theory goes, the dominance of shareholders and their exclusive authority in decision-making must be the most efficient structure for corporations. The neoliberal economic theory that underlies shareholder primacy is deeply flawed and does not reflect how corporations actually operate and distribute value between stakeholders. While many economists that the shareholder primacy model is, and always has been, a “natural law” of the market, its dominance in American corporate governance is only decades old — and ultimately, shareholder primacy is a failed economic model. By documenting the economic arguments made to support shareholder primacy and showing why these assumptions do not hold, this article adds to the growing literature on the effects of corporate shareholder primacy. I argue that shareholder primacy should be replaced by a model of “stakeholder corporations,” in which stakeholders collectively engage in corporate governance and own corporate equity.