Volume 3, Issue 1 - “Shareholder Value Myth” by Lynn Stout

: The concept of unitary “shareholder value” and its reflection in near-term stock prices formed the centrepiece of contemporary corporate governance up to the 2008 financial crisis. The crisis has elicited both more critical and clearer, book-length accounts of the relationship of law, corporate governance and finance. The concepts analysed in Lynn Stout’s The Shareholder Value Myth are considered herein, as part of a commentary on the continuing evolution of academic corporate law and governance.

This review article seeks to celebrate the deconstruction of the mythology of shareholder value inspired by Lynn Stout, and to dismantle the hegemony of agency theory, which originated the concepts of shareholder value and shareholder primacy. In order to offer a contextualized, historical critique of the intellectual forces that created agency theory and the concept of shareholder value, the analysis presents a broad consideration of the financialization of the Anglo-American corporation in the later decades of the twentieth century. It was in this period that the Anglo-American corporation was crudely transformed from being a wealth-creating vehicle for the wider community of stakeholders and whole economy, into a bundle of assets with the sole purpose of benefiting shareholder interests. This analysis traces some of the historical critique of corporate purpose, and the wider implications of the critique for corporate activity. The article goes on to analyse the interpretations of corporate purpose emerging in modern company law reform. Finally, the article considers the implications of the growing international corporate social responsibility movement for directors’ duties, which is arguably in contradiction to many of the fundamental beliefs of shareholder value, and recasts the direction of corporations towards more responsible and sustainable value creation.

The corporate governance thought has been dominated since 30 years by the shareholder primacy model. Lynn Stout present us, in his brilliant book, The Shareholder Value Myth, a very clear and conclusive argumentation against this view. In my comments, I consider first some key critics of the shareholder value ideology and its foundations. Next, I address the question of the real nature of shareholders, and shareholders’ interests, essential in the argumentation of Lynn Stout, before coming to critical issues concerning directors and managers. That is, first, the normative question of director’s duties, and secondly the factual question of the nature of the top management in contemporary capitalism.

What is the purpose of the corporation? This fundamental question has troubled generations of corporate scholars. It troubles them still, as witness the thoughtful and thought-provoking pieces by Thomas Clarke, Faith Stevelman and Olivier Weinstein gathered together in this issue of the CONVIVIUM. In this brief essay, I do not comment, in any detail, on Clarke’s, Stevelman’s, or Weinstein’s articles. Rather, I seek to defend their work, and my book as well, from the predictable charge that we have not offered a common theory of corporate purpose to “beat” shareholder primacy theory. In doing this, I exercise the lawyer’s prerogative and defend against the “it takes a theory” accusation by arguing in the alternative. First, I argue that sometimes a theory can be so misleading that it should be abandoned, even if no good alternative is available. Second, I argue more tentatively that there may be in fact a superior alternative theory of corporate purpose implicit in the literature critiquing shareholder primacy, including the articles by Clarke, Stevelman, and Weinstein. This theory, which might be dubbed the multifunction theory, recognizes that the corporation is only an organizational form, a means that can be (and is) employed by different individuals to serve different ends. Clark, Stevelman, Weinstein, and I have all at different times adopted slightly different perspectives on what the ends of the corporation ought to be. We may all, from our own perspectives, be correct.