Skip to main content Accessibility help

We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.

Close cookie message
×
Hostname: page-component-5cf477f64f-fcbfl Total loading time: 0 Render date: 2025-04-08T05:06:14.531Z Has data issue: false hasContentIssue false

Chapter 7 - Shareholder Primacy vs. Stakeholder Theory

The Law as Constraint and Potential Enabler of Stakeholder Concern*

from Part II - Stakeholder Theory and Society

Published online by Cambridge University Press:  01 May 2019

By
David Rönnegard  and
N. Craig Smith
Edited by
Jeffrey S. Harrison ,
Jay B. Barney ,
R. Edward Freeman  and
Robert A. Phillips
Jeffrey S. Harrison
Affiliation:
University of Richmond
Jay B. Barney
Affiliation:
University of Utah
R. Edward Freeman
Affiliation:
University of Virginia
Robert A. Phillips
Affiliation:
York University, Toronto
Get access

Summary

This chapter examines the Shareholder Primacy Norm (SPN) as a widely acknowledged impediment to corporate social responsibility (CSR), including how this relates to Stakeholder Theory. We start by explaining the SPN and then review its status under US and UK law and show that it is not a legal requirement, at least under the guise of shareholder value maximization. This is in contrast to the common assertion that managers are legally constrained from addressing CSR issues if doing so would be inconsistent with the economic interests of shareholders. Nonetheless, while the SPN might be muted as a legal norm, we show that it is certainly evident as a powerful social norm among managers and in business schools— reflective, in part, of the sole voting rights of shareholders on corporate boards and of the dominance of Shareholder Theory. We argue that this view of CSR is misguided, not least when associated with claims of a purported legally enforceable requirement to maximize shareholder value. We propose two ways by which the influence of the SPN among managers might be attenuated: extending voting rights to non-shareholder stakeholders or extending fiduciary duties of executives to non-shareholder stakeholders.

Type
Chapter
Information
The Cambridge Handbook of Stakeholder Theory , pp. 117 - 131
Publisher: Cambridge University Press
Print publication year: 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2): 291–309.Google Scholar
Agle, B. R., & Mitchell, R. K. (2008). Introduction: Recent research and new questions. In Dialogue: Towards superior stakeholder theory. Business Ethics Quarterly, 18(2): 153–159.Google Scholar
Anderson, E. (2000). Beyond homo economics: New developments in theories of social norms. Philosophy and Public Affairs, 29(2): 170–200.Google Scholar
American Law Institute. (1994). Principles of corporate governance: Analysis and recommendations. St. Paul, MN: American Law Institute Publishers.Google Scholar
Benz, M., & Frey, B. S. (2007). Corporate governance: What can we learn from public governance? Academy of Management Review, 32: 92–104.Google Scholar
Berle, A. A. (1931). Corporate powers as powers of trust. Harvard Law Review, 44: 1049–1074Google Scholar
Berle, A. A. (1932). For whom are corporate managers trustees: A note. Harvard Law Review, 45(7): 1365–1372CrossRefGoogle Scholar
Berle, A. A., & Means, G. (1932). The modern corporation and private property. New York: Macmillan.Google Scholar
Blume, M. E., & Keim, D. B. (2012). Institutional investors and market liquidity: Trends and relationships. Working paper, The Wharton School, University of Pennsylvania, USA.Google Scholar
Boatright, J. R. (1994). Fiduciary duties and the shareholder-management relation: Or, what’s so special about shareholders? Business Ethics Quarterly, 4(4): 393–407.Google Scholar
Boatright, J. R. (2002). Contractors as stakeholders: Reconciling stakeholder theory with the nexus-of-contracts firm. Journal of Banking and Finance, 26: 1837–1852.Google Scholar
Bonnafous-Boucher, M. (2005). Some philosophical issues in corporate governance: The role of property in stakeholder theory. Corporate Governance, 5(2): 34–47.Google Scholar
Campbell, J. L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review, 32(3): 946–967.Google Scholar
Chilosi, A., & Damiani, M. (2007). Stakeholders vs. shareholders in corporate governance. Journal of Corporate Governance, 6(4): 7–45.Google Scholar
Cialdini, R. B. & Trost, M. R. (1998). Social influence: Social norms, conformity and compliance. In Gilbert, D. T., Fiske, S.T., & Lindzey, G., eds., The Handbook of Social Psychology, vol. 2, pp. 151–92. New York: McGraw-Hill.Google Scholar
Clark, R. (1985). Agency costs versus fiduciary duties. In Pratt, J. W. & Zeckhauser, R. J., eds., Principals and Agents: The Structure of Business, pp. 55–79. Boston: Harvard Business School Press.Google Scholar
Clark, W. H., Jr. & Babson, E. K. (2012). How benefit corporations are redefining the purpose of business corporations. William Mitchell Law Review, 38(2): 817–851.Google Scholar
Cohn, S. R. (1983). Demise of the director’s duty of care: Judicial avoidance of standards of sanctions through the business judgment rule. Texas Law Review, 62(4): 591–613.Google Scholar
Davis, G. F. (2008). A new finance capitalism? Mutual funds and ownership re-concentration in the United States. European Management Review, 5: 11–21.Google Scholar
Dobson, J. (1999). Is shareholder wealth maximization immoral? Financial Analysts Journal, 55(5): 69–75.Google Scholar
Dodd, M. E. (1932). For whom are corporate managers trustees? Harvard Law Review, 45: 1145–1163.Google Scholar
Eisenberg, M. A. (2000). Corporations and other Business Organizations. New York: Foundation Press.Google Scholar
Evan, W. M., & Freeman, R. E. (2003). A stakeholder theory of the modern corporation: Kantian capitalism. In Beauchamp, T. L. & Bowie, N. E., eds., Ethical theory and business, pp. 97–106. London: Prentice Hall.Google Scholar
Fisch, J. E. (2006). Measuring efficiency in corporate law: The role of shareholder primacy. The Journal of Corporation Law, 31: 637–674.Google Scholar
Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Harper Collins.Google Scholar
Freeman, R. E., & Evan, W. M. (1990). Corporate governance: A stakeholder approach. Journal of Behavioral Economics, 19(4): 337–359.CrossRefGoogle Scholar
Freeman, R. E., Harrison, J. S., Wicks, A. C., (2007). Managing for stakeholders: Survival, reputation and success. New Haven: Yale University Press.Google Scholar
Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & de Colle, S. (2010). Stakeholder theory: The state of the art. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Friedman, M. (1962). Capitalism and Freedom. Chicago: University of Chicago Press.Google Scholar
Friedman, M. (1970). The social responsibility of business is to increase its profits. The New York Times Magazine, September 13.Google Scholar
Galai, D., & Wiener, Z. (2008). Stakeholders and the composition of the voting rights of the board of directors. Journal of Corporate Finance, 14(2): 107–117.Google Scholar
Garriga, E. & Mele, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of Business Ethics, 53: 51–71.Google Scholar
Gardiner, B. (2009). B-schools rethink curricula amid crisis. The Wall Street Journal Europe, March 27: 10.Google Scholar
Gentile, M. C. (2004). Corporate governance and accountability: What do we know and what do we teach future business leaders? The Aspen Institute Business & Society Program.Google Scholar
Ghoshal, S. (2005). Bad management theories are destroying good management practices. Academy of Management Learning & Education, 4(1): 75–91.Google Scholar
Heracleous, L. & Lan, L. L. (2010). The myth of shareholder capitalism. Harvard Business Review, April: 24.Google Scholar
Higginbottom, K. (2017). Board diversity still unusual in a Fortune 500 firm. Forbes, 30 January. Retrieved August 15, 2017, from www.forbes.com/sites/karenhigginbottom/2017/01/30/board-diversity-still-unusual-in-a-fortune-500-firm/.Google Scholar
Hinkley, R. (2002). How corporate law inhibits social responsibility. The Humanist, 62(2): 26–28Google Scholar
Holland, Kelley. (2009). Is it time to retrain B-schools? The New York Times, March 15.Google Scholar
ICSA. (2005). Corporate governance. London: ICSA Publishing.Google Scholar
Jensen, M. C. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12(2): 235–256.Google Scholar
Jones, T. M. (2010). The future of business ethics research: Reflections on the twentieth anniversary of Business Ethics Quarterly. Business Ethics Quarterly, 20(4): 746–747.Google Scholar
Kraakman, R. R., Davies, P., Hansmann, H., Hertig, G., Hopt, K. J., Kanda, H., & Rock, E. B. (2004). The anatomy of corporate law: A comparative and functional approach. New York: Oxford University Press.Google Scholar
Lankoski, L., & Smith, N. C. (2018). Alternative objective functions for firms. Organization & Environment, 31(3): 242–262.Google Scholar
Marens, R., & Wicks, A. (1999). Getting real: Stakeholder theory, Managerial practice, and the general irrelevance of fiduciary duties owed to shareholders. Business Ethics Quarterly, 9(2): 273–293.Google Scholar
Marcoux, A. M. (2003). A Fiduciary Argument Against Stakeholder Theory. Business Ethics Quarterly, 13(1): 1–24.Google Scholar
McDonald, D. (2017). Harvard Business School and the propagation of immoral profit strategies. Newsweek, 6 April. Retrieved August 15, 2017, from www.newsweek.com/2017/04/14/harvard-business-school-financial-crisis-economics-578378.html?amp=1&utm_content=bufferbb608&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer.Google Scholar
McDonnell, B. H. (2004). Corporate constituency statutes and employee governance. William Mitchell Law Review, 30(4): 1227–1259.Google Scholar
McKinsey. (2006). Global survey of business executives: Business and society. McKinsey Quarterly, 2: 33–39.Google Scholar
McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26(1): 117–127.CrossRefGoogle Scholar
Millon, D. (1991). Redefining corporate law. Indiana Law Review, 24: 223–277.Google Scholar
Myatt, M. (2013). Top 10 reasons diversity is good for the boardroom. Forbes, 18 November. Retrieved August 15, 2017, from www.forbes.com/sites/mikemyatt/2013/11/18/top-10-reasons-diversity-is-good-for-the-boardroom/#1ab235001b90.Google Scholar
New Scientist. (2010). Editorial: Time for another green revolution; A fog of unreliable information and confusion is hampering efforts to weigh up eco-credibility. New Scientist, 20 February: 3.Google Scholar
Orts, E. W. (1992). Beyond shareholders: Interpreting corporate constituency statutes. George Washington Law Review, 61: 14–135.Google Scholar
Paine, L. S. (2006). The fiduciary relationship: A legal perspective. Note prepared for class discussion. Boston: Harvard Business School.Google Scholar
Peregrine, M. W. (2016). Corporate board diversity gets push from business leaders. The New York Times, 12 October. Retrieved August 15, 2017, from www.nytimes.com/2016/10/14/business/dealbook/corporate-board-diversity-gets-push-from-business-leaders.html.Google Scholar
Phillips, R. A. (1997). Stakeholder theory and a principle of fairness. Business Ethics Quarterly, 7(1): 51–66.CrossRefGoogle Scholar
Phillips, R. (2003). Stakeholder theory and organizational ethics. San Francisco: Berrett-Koehler Publishers.Google Scholar
Phillips, R., Freeman, E. R., & Wicks, A. C. (2003). What stakeholder theory is not. Business Ethics Quarterly, 13(4): 479–502.CrossRefGoogle Scholar
Pickering, M. A. (1968). Company as a separate legal entity. Modern Law Review, 31: 481–511.Google Scholar
Polaris Institute. (2007). Coca-Cola Company wins corporate greenwashing award. Polaris Institute. Retrieved April 29, 2013, from www.polarisinstitute.org/coca_cola_company_wins_corporate_greenwashing_award.Google Scholar
Porter, M. E., & Kramer, M. R. (2006). The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12): 78–92.Google Scholar
Porter, M. E., & Kramer, M. R. (2011). Creating shared value: Redefining capitalism and the role of the corporation in society. Harvard Business Review, 89(1/2): 62–77.Google Scholar
Rose, J. M. (2007). Corporate directors and social responsibility: Ethics versus shareholder value. Journal of Business Ethics, 73: 319–331.Google Scholar
Rose, N. L, & Wolfram, C. (2002). Regulating executive pay: Using the tax code to influence chief executive compensation. Journal of Labour Economics, 20(2): 138–174.Google Scholar
Schrenk, L. P. (2006). Equity versus stakeholder and corporate governance: Developing a market for morality. The Business Renaissance Quarterly, 1(3): 81–90.Google Scholar
Skadden. (2011). Air Products & Chemicals, Inc. v. Airgas, Inc. Skadden Newsletter, February 16. Retrieved May 14, 2013, from www.skadden.com/newsletters/Air_Products_Chemicals_Inc_v_Airgas_Inc.pdf.Google Scholar
Smith, D. G. (1998). The shareholder primacy norm. The Journal of Corporation Law, 23: 277–323.Google Scholar
Smith, N. C., & Van Wassenhove, L. (2010). How business schools lost their way. BusinessWeek, January 11. Retrieved April 29, 2013, from www.businessweek.com/bschools/content/jan2010/bs20100111_383186.htm.Google Scholar
Stout, L. (2012). The shareholder value myth: How putting shareholders first harms investors, corporations and the public. San Francisco: Berrett-Koehler Publishers.Google Scholar
Testy, K. (2002). Linking progressive corporate law with progressive social movements. Tulane Law Review, 76: 1227–1252.Google Scholar
van Marrewijk, M. (2003). Concepts and definitions of CSR and corporate sustainability: Between agency and communion. Journal of Business Ethics, 44: 95–105.Google Scholar
Vermaelen, T. (2009). Maximizing shareholder value: An ethical responsibility? In Smith, N. C. & Lenssen, G., ed., Mainstreaming corporate responsibility. Chichester: Wiley.Google Scholar
Walsh, J. P. (2004). The corporate objective revisited. Organization Science, 15(3): 349.Google Scholar
West, D. M. (2011). The purpose of corporations in business and law school curricula. Governance Studies at Brookings.Google Scholar

Save book to Kindle

To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×