Is shareholder primacy the best corporate governance model to pursue? It may be tempting to assume so. Why should the hard-earned income of millions of faceless investors not be directed towards the payment of dividends and the realization of capital gains? At first glance, shareholder primacy is a corporate governance model at home in a democratic state. It is possible, however, that shareholder primacy is a threat to the economic stability and social well-being of democratic states. This threat is rooted in a free-market ideology which isolates the concept of shareholder from the concept of stakeholder. A shareholder is only affected by economic imperatives. A stakeholder must live in the material world where corporations operate. When the shareholder, as opposed to the stakeholder, is the privileged subject of corporate law, the democratic potential of corporate governance may not be fully realized.
Certain authors criticize the shareholder primacy model of corporate governance. In “Disembedding Corporate Governance: The Crisis of Shareholder Primacy in the UK and Canada” Michael Marin investigates the 2008 global financial crisis . He argues that shareholder primacy was at the the root of the crisis. Under this model, profit maximization is incentivized, which , in turn, leads to excessive risk-taking by large financial institutions, and, ultimately, economic collapse. Marin blames lack of legal regulation for the emergence of an economic system “disembedded” from its social context.
Marin argues that, while the shareholder primacy model remains uncritical of the social context in which it operates, corporations (particularly large financial institutions) operate within a broader capitalist society. Capitalism is expressed through material conditions – not just markets. Corporate risk-taking threatens the economic stability of the whole society. This threat underscores the need for robust regulation.
The artificial “disembedding” of corporate governance from the broader social context is obscured by market ideology, which assumes that self-regulating forces (such as the managerial market or the market for corporate control) will result in certain predictable outcomes. Under the shareholder primacy model, the relationship between corporations and shareholders is disembedded from broader social relations. How could this be an adequate conceptual tool with which to understand contemporary economics?
Shareholder primacy is an ideological position that inflicts economic and social harm on the societies in which corporations operate. Marin illustrates how shareholder primacy exacerbates the boom and bust cycle of capitalist economies. Under a corporate governance model characterized by shareholder primacy, corporate management is accountable only to shareholders – not society at large. The best form of governance would surely benefit the whole, not just an isolated part of society.
Lack of accountability combined with limited liability encourages corporations to pursue high-risk business strategies aimed exclusively at the maximization of share value. If long-term economic stability is the goal, shareholder primacy must adapt to a corporate governance model that accounts for the economic, political and social importance of other stakeholders.
Crisis or critique? Perhaps it is time to subject our assumptions about shareholder primacy to the latter.