In Defense Of The Shareholder WealthMaximization Norm: A Reply To ProfessorGreen

Shareholder wealth maximization long has been the fundamental norm which guides U.S. corporate decisionmakers. Indeed, one rarely finds stronger judicial rhetoric than that used by the court in the now classic case of Dodge v. Ford Motor Co.:A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.(1)Our hosts nonetheless posit that these are no longer words to live by, arguing that the shareholder wealth maximization norm is both descriptively and normatively deficient.Frankly, I am not persuaded. Despite a smattering of evidence to the contrary,(2) the mainstream of corporate law remains committed to the principles espoused by the Dodge court. By mainstream I refer of course to Delaware's courts and legislature which are still our premier corporate lawmakers. As it has long done, Delaware law still requires directors to put shareholder interests ahead of those of nonshareholders.(3) At least in Delaware, the shareholder wealth maximization norm thus remains a more accurate description of the state of the law than any of its competitors.(4)A more interesting question is posed when we ask whether shareholder wealth maximization continues to suffice from a normative perspective. In my view, Professor Green brings a valuable perspective to the table on this question.(5) At the end of the day, however, I remain unpersuaded that the principle of shareholder wealth maximization is normatively deficient.As I read his paper, Professor Green views the choice between shareholder wealth maximization and the "multi-fiduciary stakeholder perspective"(6) as a morally neutral one. In other words, he treats the debate as taking place solely on the public policy level.(7) I doubt whether he is correct on this score, but that is a question perhaps best left for another day. It is principally those portions of his paper directed at or relevant to questions of policy, rather than of morality, with which I intend to take issue.Professor Green begins with the premise that shareholders do not own the corporation.(8) From this he concludes that the law can and should move toward a new definition of corporate managers' fiduciary obligations. So stated, I impute both a positive and a normative component to Green's conclusion. The positive component is that corporate law can move away from the shareholder wealth maximization norm. The normative component is that corporate law should do so.Although Green states the normative conclusion somewhat diffidently, devoting most of his attention to his premise and positive conclusion, only his normative conclusion merits detailed analysis. This is so because a neoclassical proponent of the shareholder wealth maximization norm can quite cheerfully concede both Green's premise and his positive conclusion without conceding his normative conclusion. Indeed, the former are wholly consistent with the prevailing neoclassical model of the firm.Nexus of contracts theory visualizes the firm not as an entity, but as an aggregate of various inputs acting together to produce goods or services.(9) Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear the risk of losses and monitor the performance of management. Management monitors the performance of employees and coordinates the activities of all the firm's inputs. The firm is seen as simply a legal fiction representing the complex set of contractual relationships between these inputs. In other words, the firm is treated not as a thing, but rather as a nexus or web of explicit and implicit contracts establishing rights and obligations among the various inputs making up the firm. …