Shareholder Primacy and Deontology

Abstract

This article argues that shareholder primacy cannot be defended on the grounds that there is something special about the position of shareholders that grounds a right to preferential treatment on part of management. The notions of property and contract, traditionally thought to ground such a right, are now widely recognized as incapable of playing that role. This leaves shareholder theorists with two options. They can either abandon the project of arguing for their view on broadly deontological grounds and try to advance consequentialist arguments instead or they can search for other morally relevant properties that could ground shareholder rights. The most sustained argument in the latter vein is Marcoux's attempt to show that the vulnerability of shareholders mandates that managers are their fiduciaries. I show that this argument leads to the unacceptable conclusion that it would be unethical for corporations to make incomplete contracts with nonshareholding stakeholders.Hasko von Kriegstein is a Postdoctoral Researcher at

Weeding Out Flawed Versions of Shareholder Primacy: A Reflection on the Moral Obligations That Carry Over from Principals to Agents

“…Agency thesis: Managers are agents of shareholders. They are shareholders' fiduciaries who ought to run the company in shareholders' interest (Friedman 1962(Friedman , 1970Kraakman 2001, 2012;Hasnas 1998;Heath , 2014Hessen 1979;Jensen and Meckling 1976;Kaler 2003;Langtry 1994;Mansell 2013Mansell , 2015McMahon 1981;Sternberg 2000Sternberg , 2010Von Kriegstein 2015).…”

“…If one looks at the various authors who have defended shareholder primacy one comes to identify the following as their core commitment: Agency thesis : Managers are agents of shareholders. They are shareholders’ fiduciaries who ought to run the company in shareholders’ interest (Friedman 1962, 1970; Goodpaster 1991; Hansmann and Kraakman 2001, 2012; Hasnas 1998; Heath 2011, 2014; Hessen 1979; Jensen and Meckling 1976; Kaler 2003; Langtry 1994; Mansell 2013, 2015; Marcoux 2003; McMahon 1981; Sternberg 2000, 2010; Von Kriegstein 2015). …”

“…Many business ethicists have sought to provide alternatives to shareholder primacy. The driving motivation for this (recognized by both defenders and critics of shareholder primacy) has been the perception that shareholder primacy does not impose enough moral obligations (Arnold 2003, 163; Bakan 2004; Bower and Paine 2017; Corporate Watch 2006; Freeman 1998, 126; Freeman et al 2010, 4; Ghoshal 2005; Goodpaster 1991, 62; Heath 2006, 540–2; 2007, 367–9; Hsieh 2017b, 293; 2017a; Kochan 2002; Von Kriegstein 2015, 466).…”

“…Other scholars have argued that the agency thesis is grounded on the vulnerability of shareholders, a vulnerability that is recognized in the fact that shareholders are the company’s residual claimants and that they have control over the board of directors (Hansmann 1988; Hansmann and Kraakman 2001; Heath 2010; Marcoux 2003). The agency thesis has also been justified on the alleged social benefit that this form of corporate governance provides (Berle and Means 1932; Boatright 1994; Hansmann and Kraakman 2001, 2012; Heath 2006, 2007, 2011; Von Kriegstein 2015). There have also been arguments contending that the agency thesis best accounts for how we think about business enterprises (Heath 2006, 551, 2010, 199), how we understand and encourage ‘‘entrepreneurial risk-taking’’ (Goodpaster 1991, 66) and ‘‘equity markets’’ (Marcoux 2003, 15), and how we think about business activity (Sternberg 2000).…”

The Financial Effects of Strategic Divestment – An Analysis of GE Capital

“…Drilling specifically to the concept of shareholder primacy it readily becomes apparent that managing and planning strategy that place shareholders first and foremost at all times might very well short change the organization in the long run. Put simply, the concept and methodology of shareholder primacy has a powerful effect on the mindset of management, and management actions as it relates to business decision making and shareholder relations (Kriegstein, 2015). Earnings per share, net income, and other quarterly driven targets are some of the most widely cited and used metrics to determine success of the management team.…”