I'm going to be on a panel here at UCLA on Thursday along with several other corporate governance theorists. We've each been given 5 minutes to summarize our theory. Naturally, I'll be talking about director primacy. Obviously, it will be very difficult to summarize any theory of corporate governance in 5 minutes, so I will direct both my listeners and you, my readers, to my book The New Corporate Governance in Theory and Practice. In the meanwhile, herewith the bullet points I'll be sprinting through come Thursday afternoon: Director primacy is board-centric, but shareholder wealth focused. Director primacy thus differs from both shareholder primacy and Stout & Blair's team production model, not to mention the various stakeholder theories. I claim that the debate between these models has conflated the means and ends of corporate governance. For example, shareholder primacy really makes two distinct claims. As to the ends of corporate governance-in other words, the social purpose and role of the corporation-shareholder primacy claims that the duty of directors and managers is to maximize shareholder returns within the bounds of law. Director primacy concurs. As to the means of corporate governance-who ultimately has decision-making authority-shareholder primacy says it is-or, rather, ought to be-the shareholders. Here, director primacy says no. The powers of the board of directors are original and undelegated. The board of directors is the nexus of corporate contracts. The shareholders' claim on the corporation is merely one of those contracts. The intersection of the power of directors to manage the corporation and their obligation to do so in the shareholders' interest creates a variant of the principal-agent problem. There is a core tension between the board's authority and the need to ensure that the board uses its authority responsibly. Shareholder voting rights are one of the mechanism by which directors are held to account. If we try to make more of shareholder voting, if we try to elevate it into a functioning part of the governance system, however, we undermine the centralization of power in the board that makes the modern public corporation possible. The power to review, after all, is the power to decide. Every time we increase the shareholder's right to review board decisions, we are thus undermining the core of corporate governance by shifting the power of decision to shareholders. This transfer of authority from board to shareholders is undesirable in itself. Worse yet, the interests of activist investors likely to differ from those of shareholders as a whole State/local and union funds are among the most active on governance issues. They have private interests: "progress on labor rights desired by union fund managers and enhanced political reputations for public pension fund managers." (Romano) Director primacy thus calls for constraints on proposals to expand the role of shareholders in corporate governance.
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