The making of the shareholder primacy governance model: Price theory, the law and economics school, and corporate law retrenchment advocacy

Abstract

Shareholder welfare (also addressed as shareholder primacy and shareholder value in the corporate governance and economics theory literature, and here used interchangeably with the more generic term shareholder welfare) has been fortified in the present regime of investor capitalism and is today widely normalized and taken for granted. However, when examining the theoretical tenets, operative methodologies, and stated preferences regarding the virtues of efficiency as a primary economic objective, and wider assumptions regarding alleged costs generated in the corporate system on the basis of managerial discretion and extant corporate legislation and court rulings, the advocacy of the benefits of shareholder welfare is compromised considerably; i. e., it is based on unjustified preferences and far from irrefutable propositions. Tracing the roots of agency theory and its forceful defence of shareholder welfare back to Chicago economics price theory and its application in law and economics scholarship, instituted in the early 1960s, theoretical inconsistencies in the predominant corporate governance model are demonstrated, accompanied by empirical materials that discredit the claim that the market for corporate control can replace, at low cost, the management discretion governance model. The study thus contributes to the critique of the role of shareholder welfare advocacy in investor capitalism.