Thursday, March 14, 2013

Theorizing Companies and Shareholder Interests


The two previous issues of the Economist magazine cover different aspects of the functioning of companies and the impact they have on shareholder value and other aspects of society.

One set of issues (discussed here and here) deals with the increase in activism among shareholders. While activist shareholders are making their impact felt in companies around the world, there is a question regarding the identity and motivations of such investors and whether their activities will engender short-termist behavior at the cost of long-term prospects of companies. Professor Stephen Bainbridge, who is a key proponent of the director primacy model, takes issue with the shareholder primacy approach that considers shareholders as owners of the corporations whose paramount nature drives the analysis of corporate organization and functioning.

Closely linked to these issues is Economist’s Schumpeter column that reviews a new book titled “Firm Commitment” by Professor Colin Mayer which reconsiders the nature and purpose of a company. The question again relates to whether the goal of shareholder value promoters short-termism, and whether this can be mitigated. The solution proposed in the book is the creation of a new class of companies – trust companies – that would go beyond mere shareholder interest and also balance the interests of other stakeholders.

While the debate is interesting at one level, the fact that many of these issues remain unresolved for several decades seems disconcerting. This discourse has lingered from the early part of the 20th century since the landmark work of Berle and Means, and it appears that no clear solutions have been found. The lack of a resolution might also indicate the difficult nature of the issues faced by the nature of companies as legal entities or organization and the different types of problems that are created (with short-termism being the problem that is under the spotlight since the financial crisis). This also leaves scope for pushing the boundaries of jurisprudence in corporate law and governance.

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