Theorizing Companies and Shareholder Interests

The two previous issues of the
Economist magazine cover different aspects of the functioning of companies and
the impact they have on shareholder value and other aspects of society.
One set of issues (discussed here
and here)
deals with the increase in activism among shareholders. While activist
shareholders are making their impact felt in companies around the world, there
is a question regarding the identity and motivations of such investors and
whether their activities will engender short-termist behavior at the cost of
long-term prospects of companies. Professor Stephen Bainbridge, who is a key proponent
of the director primacy model, takes
issue
with the shareholder primacy approach that considers shareholders as
owners of the corporations whose paramount nature drives the analysis of
corporate organization and functioning.
Closely linked to these issues is
Economist’s Schumpeter column
that reviews a new book titled “Firm
Commitment
” by Professor Colin
Mayer
which reconsiders the nature and purpose of a company. The question
again relates to whether the goal of shareholder value promoters short-termism,
and whether this can be mitigated. The solution proposed in the book is the
creation of a new class of companies – trust companies – that would go beyond
mere shareholder interest and also balance the interests of other stakeholders.

While the debate is
interesting at one level, the fact that many of these issues remain unresolved for several decades seems disconcerting.
This discourse has lingered from the early part of the 20th
century since the landmark work of Berle and Means, and it appears that no
clear solutions have been found. The lack of a resolution might also indicate
the difficult nature of the issues faced by the nature of companies as legal
entities or organization and the different types of problems that are created
(with short-termism being the problem that is under the spotlight since the financial
crisis). This also leaves scope for pushing the boundaries of jurisprudence in
corporate law and governance.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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