Moving Beyond Shareholder Primacy and Stakeholder Theory: The Corporation as a Fund
Two apparently dichotomous theories dominate corporate governance. In shareholder primacy, the role of the board is to act in the interests of shareholders as perceived owners of the company. Despite the heterogeneous composition of shareholders in companies, those interests are understood to be profit maximisation. Stakeholder theory requires boards in their decision making to balance up the competing interests of stakeholders. The debate over the role of the board is a longstanding one set out in a series of articles by Merrick Dodd and Adolfe Berle. The source of the competing theories is identified as historical: until limited lability brought about the separation of the entity from the shareholders during the second half of the nineteenth century, a company was comprised of its shareholders. Shareholder primacy is based on the company being comprised of shareholders. Stakeholder theory is based on the board having relationships with all the stakeholders in the company with the interests of shareholders not prioritised over other stakeholders. But the board owes its obligations to the company not its stakeholders.
This paper argues for an alternative theory; that the modern company is an entity separate from shareholders that is a legal person that holds rights through the corporate fund. The role of the board as its guardian and representative is to maximise the value of the fund in a sustainable manner. Shareholders as the holders of shares in the fund will benefit from entity maximisation, but directors do not owe duties directly to shareholders. Similarly, in its decision making, the board may make decisions that benefit other stakeholders only if they are satisfied those decisions will maximise the value of the fund. The normative implications for boards of directors of multinational companies and wholly owned subsidiaries if their fiduciary obligations are conceived of as being owed to the corporate legal person and the resulting challenges for corporate law are considered.