In a time of climate change, racial and economic inequality, and crisis stemming from the global pandemic, corporations are alternately maligned for their conduct and embraced as a solution for change. Observers have increasingly excoriated the traditional view of corporate purpose—that corporations should be managed for the benefit of shareholders, and specifically, to maximize their wealth—as contributing to societal problems. As a result, only two decades after prominent scholars announced “the end of history” in favor of shareholder primacy, luminaries in the field are again asking: For whom is the corporation managed? Do fiduciaries owe a duty to maximize shareholder value or may they prioritize the interests of other stakeholders?
In a new paper, we contribute to this important debate by enlarging the aperture. Specifically, we provide an original account of the “corporate governance machine”—a complex system of corporate governance in the United States composed of law, markets, and culture. We describe each of these components and show how the machine powerfully drives corporate behavior and solidifies corporate purpose as promoting shareholder interests.
Although legal academics have generally focused on corporate law as a key determinant of purpose, our analysis reveals that this element may well be the least important: a vast array of institutional players—proxy advisors, stock exchanges, ratings agencies, institutional investors and associations—enshrine shareholder primacy in public markets. Indeed, we show the very concept of corporate governance promoted by these players developed alongside the principal-agent model of the corporation, such that “good governance” is often equated with minimizing agency costs in the pursuit of shareholder value. Professional education, the media, and politics further reinforce this cultural understanding.