Shareholder primacy

Background

Shareholder primacy was first articulated in the decision of Dodge v. Ford Motor Co. in 1919. In the Michigan Supreme Court's opinion, it stated that "There should be no confusion... A business corporation is organized and carried on primarily for the profit of the stockholders." It is commonly asserted that the case established a precedent that managers had to maximize shareholder profit, but the status of the court's statement on the topic is disputed, with some legal scholars arguing that it constitutes obiter dicta, or judicial comments that lack binding force.

In their 1932 publication on foundations of United States corporate law and governance—The Modern Corporation and Private Property—Adolf Berle and Gardiner Means's introduced the idea that "shareholders are the corporation's 'true owners'."

In his 1962 book, Capitalism and Freedom, the economist Milton Friedman advanced the theory of shareholder primacy which says that "corporations have no higher purpose than maximizing profits for their shareholders." Friedman said that if corporations were to accept anything but making money for their stockholders as their primary purpose, it would "thoroughly undermine the very foundation of our free society." His article, "A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits", was published September 13, 1970, in The New York Times:

Economist Michael C. Jensen, a former student of Friedman at the University of Chicago, is also widely credited with helping to popularize the idea of shareholder primacy.

The doctrine waned in later years. In March 2009, Jack Welch, known for promoting shareholder primacy during his tenure as CEO of GE, stated in an interview with the Financial Times, "On the face of it, shareholder value is the dumbest idea in the world." In August 2019, the Business Roundtable published its alternative view, focused on long-term benefits for a broad range of "stakeholders."

References

References

1. John F. Olson. (May 2007). "Professor Bebchuk's Brave New World: A Reply to 'The Myth of the Shareholder Franchise'". Virginia Law Review.
2. Smith, D. Gordon. (Winter 1998). "The Shareholder Primacy Norm". Journal of Corporation Law.
3. James Kee. (May 1995). "The Ethical Corporation?". The Free Market.
4. Gordon Pearson. (25 May 2012). "The truth about shareholder primacy". The Guardian.
5. {{cite court. (1919). link
6. Stout, Lynn A.. (2007). "Why We Should Stop Teaching Dodge v. Ford". SSRN Electronic Journal.
7. (1932). "The Modern Corporation and Private Property". [[Transaction Publishers]].
8. Palladino, Lenore. (October 1, 2019). "The Modern Corporation and Private Property The American Corporation Is in Crisis—Let's Rethink It".
9. Friedman, Milton. (September 13, 1970). "A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits". [[The New York Times]].
10. Useem, Jerry. (2019-07-22). "The Stock-Buyback Swindle". [[The Atlantic]].
11. Tong, Scott. (2016-06-14). "How shareholders jumped to first in line for profits".
12. Tong, Scott. (2020-03-03). "Jack Welch's legacy: serving shareholders".
13. (2009-03-16). "Jack Welch Elaborates: Shareholder Value". [[Bloomberg News]].
14. (August 22, 2019). "So Long to Shareholder Primacy". Harvard Law School Forum on Corporate Governance.
15. Wartzman, Rick. (2019-08-19). "America’s top CEOs say they are no longer putting shareholders before everyone else". [[Fast Company]].