Stop Trying to Maximize Shareholder Wealth (Like That)
The conventional story about shareholder wealth maximization is that for-profit businesses should maximize corporate value, which means that corporate leaders should treat long-term shareholder wealth as both goal and guide in making decisions. This Article challenges that conventional wisdom, arguing that the theory of shareholder wealth maximization does itself a disservice when it insists, either explicitly or implicitly, that cor-porate leaders deliberate in a particular way. Drawing on longstanding debates in moral and political philosophy, this Article isolates a series of self-defeating pathologies pervasive amongst consequence-maximizing theories. Consequentialists have long accepted that self-consciously aiming to maximize good outcomes turns out, paradoxically, to be a surefire way of missing one’s target. Analogizing to the corporate sphere, making deci-sions solely with an eye towards maximizing shareholder wealth invites an approach towards corporate governance that is conceptually self-defeating, practically counterproductive, and needlessly morally alienating.
But shareholder wealth maximization itself is not the problem. Rather, the problem is a mistaken, albeit widely accepted, premise that shareholder wealth maximization must specify a decisionmaking procedure in the first place. Reframing shareholder wealth as offering a criterion of corporate success—but not a corresponding method or procedure for achieving that success—positions the theory to sidestep those self-sabotaging pathologies otherwise endemic to consequence-maximizing decisionmaking procedures. Moreover, this charac-terization, call it criterial shareholder wealth maximization, strengthens the overall theory across three domains. First, it brings coherence to Delaware’s scattered doctrines around director duties, making sense of corporate law’s seemingly inconsistent mix of strict shareholder focus, deference, and boundary-policing. Second, it deflates one of the sharpest complaints leveled by critics of shareholder wealth maximization, creating space for a more stakeholder-friendly—but still fundamentally shareholder-centric—theory of corporate purpose. Third, crite-rial shareholder wealth maximization better aligns with real-world corporate practice, giving us richer resources to describe how directors and managers actually do, and should, go about creating shareholder wealth.
About the Law and Economics Workshop
Michigan’s Law and Economics Workshop provides an opportunity for faculty and students from across the University to engage with cutting-edge law and economics research by leading scholars on a wide range of legal and policy topics.
Professors J.J. Prescott ([email protected]) and Jeff Zhang ([email protected]) organize the workshop. If you would like to receive workshop announcements, please contact Alex Wroble ([email protected]) and ask to have your name added to the workshop’s email list.