Shareholder primacy, Social role of the corporation, Shareholder ownership, Shareholders, Berle-Dodd debate, Adolph A. Berle, Merrick Dodd
Corporation and Enterprise Law
In 1932, the Harvard Law Review published a debate between two preeminent corporate scholars on the subject of the proper purpose of the public corporation. On one side stood the renowned Adolph A. Berle, coauthor of the classic The Modern Corporation and Private Property. Berle argued for what is now called "shareholder primacy"—the view that the corporation exists only to make money for its shareholders. According to Berle, "all powers granted to a corporation or to the management of a corporation, or to any group within the corporation. . . [are] at all times exercisable only for the ratable benefit of all the shareholders as their interest appears."
On the other side of the debate stood esteemed professor Merrick Dodd of Harvard Law School. Dodd disagreed vehemently with Berle's shareholder primacy thesis. He argued for "a view of the business corporation as an economic institution which has a social service as well as a profit-making function." Dodd claimed that the proper purpose of the corporation (and the proper goal of corporate managers) was not confined to making money for shareholders. It also included more secure jobs for employees, better quality products for consumers, and greater contributions to the welfare of the community as a whole.
As can be seen from Delaware Vice Chancellor Leo E. Strine's Essay in the preceding pages of this journal, the debate over the social role of the corporation remains unresolved. Does the firm exist only to increase shareholder wealth (a view that Strine dubs the "property" theory)? Or, should managers also seek to serve the interests of employees, creditors, customers, and the broader society (the "entity" view)? After reading Strine's account of the current state of scholarly disagreement, and a similar account in another article he has coauthored, forthcoming in the University of Chicago Law Review, one might be tempted to throw up one's hands and conclude that academics have not lent much more insight into this question since the original Berle-Dodd debate.
In this Essay, however, I would like to suggest that we have made at least some intellectual progress over the intervening decades on the question of the proper role of the corporation. In particular, we have learned that some of the most frequently raised arguments for shareholder primacy are, not to put too fine a point on it, bad arguments. By "bad" arguments, I do not mean arguments that are somehow morally offensive or normatively unattractive. Rather, I mean arguments that are, as a positive matter, inaccurate, incorrect, and unpersuasive to the careful and neutral observer.
Stout, Lynn A., "Bad and Not-so-Bad Arguments for Shareholder Primacy" (2002). Cornell Law Faculty Publications. Paper 448.
Published in: Southern California Law Review, vol. 75, no. 5 (July 2002).