The Prophets and Profits of Shareholder Primacy Part II

Abstract This chapter provides an overview of the rationale of ‘shareholder primacy’ from an economic perspective, noting that the profit-maximizing goal of the corporation was originally conceived as an intuitive economic assumption, not as a definitional characteristic and certainly not the result of any explicit or implicit legal mandate. The discussion of economic assumptions occurs against the backdrop of broad insights about the role of self-interest within a capitalist system, including Weber’s suggestion that ‘[C]apitalism may even be identical with the restraint of “greed for gain”’, and Hirschman’s theory that pursuit of material gain was originally seen as a positive and productive restraint on the indulgence of other more socially destructive passions. Although actions taken by the profit-maximizing corporation might resemble those of the avaricious individual business proprietor, the firm’s narrow profit-seeking focus was presented as a neutral phenomenon—even one compelled by competitive forces—rather than an object of moral condemnation. The recognition by financial economists in the 1950s that, under conditions of uncertainty, ‘profit maximization’ is not a coherent goal, led to the formulation of an alternative: ‘shareholder wealth maximization’. The chapter then considers how this financial economic concept came to influence the legal understanding of the business corporation’s goal, particularly in the United States, and the criticism the concept has received—some well-founded, some based on misunderstanding.