Director Primacy: The Means and Ends of Corporate Governance

Since Ronald Coase’s famous article The Nature of the Firm appeared over six decades ago, 1 both economists and legal scholars have devoted considerable attention to the theory of the firm. 2 Over time, this body of work generated a substantial literature providing both positive and normative insights into, inter alia, the internal governance institutions of firms. 3 Although the various theories of the firm developed in that literature can be classified in various ways, and while some defy classification, two basic systems of classification capture most of the competing theories (see Figure 1 ). Along one axis (the “Means Axis”), theories of the firm are plotted according to whether they emphasize managerial or shareholder primacy. Older theories at the shareholder primacy end of the spectrum posit that shareholders own the corporation. 4 Accordingly, directors and officers are mere stewards of the shareholders’ interests. A more recent variant, known as the “nexus of contracts” or “contractarian” model, 5 which is one of Coase’s many progeny, denies that shareholders own the corporation. 6