#shareholder primacy

[earthsapien]

Inevitably, most anticapitalist or communist discussions online devolve into some argument that, essentially, we need rich entrepreneurs & founders to buy machinery, warehouses, factories, raw materials, etc.

And because of this, then that rich entrepreneur and their shareholders should maximize & reap all profits.

This is shareholder primacy.

It is not legally mandated for companies to operate this way. There are other models, even within capitalism.

[a-soup-of-trolls]

The “Corporate Agenda” - Contractarianism’s flaws

There are several approaches to corporate governance. One, the dominant one currently, is called contractarianism.

Contractarianism is the approach that a company is no more than a “nexus of contracts” - contracts between the company and employees, the company and buyers, etc. Another theory that complements the “nexus of contracts” approach is that of the “hypothetical bargain”.

The hypothetical bargain is essentially what the outcome would be in a contract that would perfectly satisfy both parties in the contract, and what would be the fairest outcome if both parties had equal bargaining power. It is from this theory combined with contractarianism that we get shareholder primacy.

Shareholder primacy works as follows:

When applying the hypothetical bargaining theory to company’s nexus of contracts, attention must be drawn to one particular contract; that between the company and its shareholders. When a person buys a share, they are buying the right to the dividends that a company may offer as well as the right of ownership of that share. However, they are also buying into a risk - the risk that should the company go bust, the shares lose value, and then cease to exist. The investment disappears.

On application of the hypothetical bargain to this relationship, it would be reasonable to expect that because a person invests in such a potentially high-risk manner, that the company gives relatively high regard to that contract to ensure that this risk is reduced as much as possible, therefore the company must set their main objective to look after the shareholder. Hence the phrase “shareholder primacy” - the shareholder takes primacy in what the company works towards.

Ideally, shareholder primacy means more than just keeping the price of shares high and giving good dividends - it should mean keeping the company safe and sustainable, ensuring a good future for the investments of the shareholders. It should mean a lot more than the short-term actions seen in banking, where the actions of the directors were irresponsible - making deals and improving the share prices and dividends in the short term, but in the long term, the actions were less well thought through - the phrase “look before you leap” could never have been more applicable.

However, financial crises are not the only thing to come of this arrangement that are of concern. There is also the issue of corporate social responsibility, and the lack thereof, causing fatalities around the world - whether it be in the case of Rana Plaza a lack of regard for those within a company’s supply chain (x), BP’s oil spills (x), or even river pollution in China from the production of solar panels (x). The shareholder primacy model is problematic, encouraging short-termism and a lack of regard for stakeholders (those who have in interest in the company but are not necessarily shareholders). Ideally, a compromise must be made - between that of protecting the shareholder (which is necessary due to the risk shouldered by the shareholder) and that of protecting stakeholders. The world can only survive so much corporate irresponsibility, and allowing the continuation of the dominance of shareholder primacy is not helping.