The Role of Shareholder Primacy in Institutional Choice

Jill E. Fisch^*

^*  Alpin J. Cameron Professor of Law, Fordham Law School.  E-mail: . Copyright 2004 by Jill E. Fisch.  Preliminary Draft – comments welcome.

	Corporate law scholarship has traditionally incorporated a comparative institutional analysis.  Unlike some other areas in the law, in business law,  a variety of institutional actors – including state and federal courts and legislators, the Securities and Exchange Commission, state attorneys general, and self regulatory organizations such as the New York Stock Exchange – produce legal rules.  Business law also deals with the ongoing question about the extent to which the contractual agreements produced by free market operation should be displaced by regulation.  In analyzing any particular rule, academics and policymakers consistently consider the relationship between institutional choice and regulatory product, with particular emphasis on efficiency considerations.  Thus, for example, the literature on regulatory competition considers the extent to which the relative efficiency of state corporate law is a functional of institutional characteristics such as state size, financial structure, judicial organization, and the participation of particular interest groups.  Similarly, in evaluating recent examples of misconduct on Wall Street and within major public corporations, commentators have contrasted the institutional context within which different regulators, such as New York Attorney General Eliot Spitzer and the SEC, operate.
	Despite the extensive academic writing on these questions of institutional choice within business law, the literature is rarely able to identify the most appropriate institutional actor.  Scholars continue to debate whether state regulatory competition is efficient, asking whether it has resulted in a race to the bottom, a race to the top, or a race to nowhere in particular.  Although most commentators view the congressional intrusions into corporate governance through the Sarbanes-Oxley of 2002 as ill-advised, many concede that the federal government has played an extensive and valuable role in corporate governance, albeit indirectly, through the adoption and implementation of the federal securities laws.  Efficiency considerations also underlie questions of regulatory authority.  Thus, when the Securities and Exchange Commission considers adopting rules that address corporate governance issues, it struggles both with the positive question of whether such rulemaking is legislatively authorized and the normative question of whether its proposed rules, to the extent they displace state corporate law, are desirable.
	This Article identifies a limitation in the existing scholarship’s evaluation of the relative efficiency of competing lawmaking institutions: an incomplete evaluation of the appropriate metric by which to measure efficiency in corporate law.  Corporate scholarship has embraced the norm of shareholder primacy – developed in the context of fiduciary principles – and applied that norm to efficiency analysis.  This norm has led corporate scholars to conceptualize efficiency exclusively in terms of shareholder wealth maximization.  Accordingly, commentators evaluate lawmaking institutions based on their ability to maximize shareholder value and analyze institutions in terms of the effectiveness of shareholder participation or representation in the rule-making process.  As a result, empirical studies fail to incorporate non-shareholder value into their efficiency analysis.  
	This Article addresses that limitation by exploring the extent to which shareholder primacy is an appropriate measure of regulatory efficiency.  In so doing, the Article exposes the centrality of the shareholder primacy norm to existing claims about the relative efficiency of Delaware corporate law and the resulting implications for theories of regulatory competition.  
	More generally, the Article demonstrates the role of shareholder primacy in institutional analysis in corporate law.  In particular, the Article argues that, among lawmaking institutions, courts are particularly well positioned to address shareholder interests in corporate law.  In contrast, other institutions, including markets and legislatures, are likely to be responsive to non-shareholder interests.  Because fiduciary principles are the ticket by which shareholders gain access to judicial lawmaking, this difference in institutional competence offers as compelling explanation for the scope of officer and director fiduciary duties in corporate law.  In particular, institutional analysis explains why shareholders, but not employees, creditors and other stakeholders, can sue officers and directors for breach of fiduciary duty.  By identifying shareholder focus as an explanation for the dominant role of judicial lawmaking in Delaware and, to some extent, in the federal system, institutional analysis refines the theory of Delaware’s position in the market for corporate charters.
	The Article proceeds as follows.  Section I briefly reviews the debate over regulatory competition in corporate law, demonstrating the role of comparative institutional analysis and exploring the centrality of the shareholder primacy norm to the evaluation of regulatory efficiency.  Section II locates the foundations of the shareholder primacy norm and explores the bases for its use as a metric of regulatory efficiency.  Section III considers the implications of these efficiency considerations for institutional analysis.  In particular, Section III demonstrates the role of fiduciary principles in allocating lawmaking authority among institutional actors. 
	I.  Regulatory Competition and Comparative Institutional Analysis 
	A.  The Debate over Regulatory Competition
	The foundations of this Article lie in the subject of regulatory competition in corporate law.  Debate over regulatory competition has been a core theme in the corporate law literature for the past thirty years.  Its origins lie in the classic Cary-Winter debate.  Former SEC Commissioner William Cary argued that the dominance of Delaware as a corporate domicile – and thus the source of state corporate law for more than half of all publicly traded U.S. corporations – reflected the appeal of Delaware’s law to corporate management.^1  Cary attributed this appeal to the laxity of Delaware law – its failure to provide shareholders with optimal protection from management malfeasance and self-dealing – and thus termed the federalist system in which incorporating businesses can choose the state law that will govern their internal affairs a “race for the bottom.”^2 

^1  William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 Yale L.J. 663 (1974).

^2
  Id. at 705.

	Cary’s conclusions were challenged by Judge Ralph Winter.^3  Judge Winter argued that corporations are subject to a variety of constraints imposed by the markets in which they operate such as the market for corporate control, the market for management services, and the markets in which their products are sold.  If Delaware law was inefficient, Winter reasoned, Delaware corporations would earn lower than normal returns, leading to an outflow of capital.^4  Winter therefore concluded that Delaware’s success in attracting incorporation could only be explained by the relative superiority of Delaware law in maximizing firm value.  Regulatory competition, in Judge Winter’s view,

^3  Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251 (1977)

^4  Id.

 produced a “race to the top.”^5

^5  Id.  Judge Winter subsequently conceded the race to the top might, in fact, merely be a “leisurely walk.”  that Ralph K. Winter, The "Race for the Top" Revisited: A Comment on Eisenberg, 89 Colum L Rev. 1526, 1529 (1989).

	Subsequent scholars, aligning themselves with either Cary or Winter, have refined the arguments on either side of the debate.^6  Although the majority of academic endorse the Winter position, thirty years of scholarly debate have failed to produce a consensus.  In fact, scholars disagree on three key questions: whether the race is to the top or the bottom, whether the race even exists, and the extent to which variation and experimentation in state law is constrained by the presence or the prospect of federal regulation.  

^6  See Jill E.  Fisch, The Peculiar Role of the Delaware Courts in the Competition  for Corporate Charters, 68 U. Cin. L. Rev. 1061, 1065-66 (2000) (summarizing academic debate).

	Much of the recent scholarship on regulatory competition has taken the form of empirical work.  A highly influential study by Rob Daines found that Delaware firms were worth more than non-Delaware firms.^7  Specifically, Daines found that incorporation in Delaware was associated with higher Tobins Qs for most years between 1981 and 1996.  Indeed, Daines found that, in 1996, Delaware firms were worth an average of 5% more than non-Delaware firms.  This, along with Daines’ analysis of Delaware’s regulation of corporate takeovers, led him to conclude that incorporation in Delaware led to higher firm value.  The Daines study, along with other empirical work,^8 is widely cited to support Winter’s claim that regulatory competition has produced a race to the top.

^7  Robert Daines, Does Delaware Law Improve Firm Value? , 62 J. Fin. Econ. 525 (2001).

^8  See, e.g., Roberta Romano, The Need for Competition in International Securities Regulation, 2 Theoretical Inquiries in L. 1, 113 (2001), at  Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J. L. Econ. & Org. 225, 273 (1985), Peter Dodd & Richard Leftwich, The Market for Corporate Charters: “Unhealthy Competition” versu.s Federal Regulation, 53 J. Bus. 59 (1980).

	Daines’ conclusions were subsequently disputed by Guhan Subramanian.^9  In a study extending the Daines model, Subramanian found first that the reported Delaware effect was driven by small firms – those with less than $50 million in net sales.  Second, and more importantly, Subramanian found that the Delaware effect disappeared, even for smaller firms, during the period from 1997 to 2002.  Subramanian concluded that Daines had failed to provide convincing empirical support for the race to the top theory.  Lucian Bebchuk, writing with various co-authors, has reached a similar conclusion, arguing that the empirical evidence failed to establish causation and that the selection of firms that choose to incorporate in Delaware is not random.^10  Moreover, Bebchuk and Alma Cohen also present empirical evidence questioning whether there is a race at all.^11  According to Bebchuk and Cohen, Delaware faces very limited competition for out-of-state incorporations, suggesting that existing market pressure may be insufficient to produce efficient legal rules.^12

^9  Guhan Subramanian, The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on the “Race” Debate and Antitakeover Overreaching, 150 U. Pa. L. Rev. 1795 (2002).

^10  Lucian A. Bebchuk, Alma Cohen & Allen Ferrell, Does the Evidence Favor State Competition in Corporate Law?, 90 Calif. L. Rev. 1775, 1780 (2002).

^11  Lucian A. Bebchuk & Alma Cohen, Firms' Decisions Where to Incorporate, 46 J.L. & Econ. 383 (2003).

^12  Id.  See also Lucian A. Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters, 112 Yale L.J. 553 (2002); Marcel Kahan and Ehud Kamar, The Myth of State Competition in Corporate Law, 55 Stan. L. Rev. 679 (2002).

	Recently the debate over regulatory competition has incorporated an increased appreciation for the role of the federal government.  Although regulation of the corporation has traditionally been divided into corporate law – supplied by the state of incorporation – and securities law – supplied by the federal government, federal law has long addressed particular governance issues that might appear to fall more properly within the purview of state corporate law.  As a result, the line of authority between states and the federal government as producers of corporate law is blurred.  The extent to which states retain lawmaking authority depends, at least in part, on the federal government’s acceptance of state lawmaking choices and, to the extent that federal lawmakers disagree with those choices, it can and does overrule them.^13  Importantly, several federal institutions have the power to overrule state choices by supplying their own corporate law, including Congress, the Securities and Exchange Commission, and the federal courts. 

^13  See, e.g., Mark J. Roe, Delaware’s Competition, 117 Harv. L. Rev. 588 (2003) (explaining that prospect of federal override provides implicit limit on scope of state lawmaking). An obvious example is the regulation of shareholder voting which, although structured in the first instance by state statutes, is dominated by federal oversight through the adoption and implementation of the federal proxy rules.  Board and committee structure and composition is largely the product of national standards imposed through SRO listing requirements.  More recently, Sarbanes-Oxley has imposed federal standards on audit committee composition and responsibilities as well as prohibiting specified conflict of interest transactions within the corporation such as loans to officers and directors.

	Although the regulatory competition debate is not explicitly argued in terms of institutional choice, many scholars have identified and explored institutional differences between state lawmaking processes and argued that those differences are key factors leading to substantial differences in the resulting legal product.  One of the most extensive analyses was conducted by Roberta Romano in her book, the Genius of American Corporate Law.  Romano argued that several of Delaware’s distinctive attributes, including its dependence on franchise taxes as a substantial component of state revenue, its specialized court system, and its specialized corporate bar whose revenues depend on its success in attracting incorporation, have led Delaware both to specialize in provide efficient corporate law and to commit to maintaining the superiority of its product.  
	In particular, Romano noted the presence of the corporate bar as a significant participant in the legislative lawmaking process.  Indeed, in Delaware, it is the corporate bar, not the legislature, that drafts corporate legislation.  In contrast to states such as New York, Delaware legislation is crafted by a specialized and expert group.  Some commentators have argued that the role of the Delaware bar in the lawmaking process increases the representation of shareholder interests.  As Curtis Alva reasons “the  corporate bar  is the group whose interests are most closely aligned with shareholders.”^14 Moreover, because most Delaware corporations do not conduct substantial operations within the state, the potential influence of other constituencies, particularly labor, is reduced.

^14  Curtis Alva, Delaware and the Market for Corporate Charters: History and Agency,  15 Del. J. Corp. L. 885, 896-916 (1990) (describing process by which Delaware corporate legislation is drafted and enacted).

	I have previously argued that regulatory competition in corporate law extends beyond differences in the state legislative processes and that, in fact, Delaware’s success in attracting corporations can be attributed to Delaware’s substantial judicial rather than legislative lawmaking.^15  The indeterminate nature of Delaware statutory law delegates a substantial lawmaking role to the Delaware Chancery court.  This delegation, coupled with the unique attributes of the Delaware court system, results in a distinctive institutional lawmaking structure. 

^15  Fisch, supra note .

	I have further argued that courts offer specific advantages in the production of corporate law Courts provide greater flexibility, responsiveness, insulation from undue political influence, and transparency in corporate lawmaking.  I have reasoned that these attributes are particularly important in the area of corporate law.  In part, I concluded, Delaware’s institutional choices with respect to the production of corporate law, explain Delaware’s continued dominance in the competition for corporate charters.
	The allocation of corporate regulation between the states and the federal government also depends on an assessment of comparative institutional competence.  Roberta Romano has defended the state system by reasoning that the “national political dynamic . . . favors managers” and that shareholders are likely to face greater collective action problems than managers in lobbying Congress.^16  In particular, Romano notes that, in addition to possessing higher stakes, managers can use corporate funds to pay their lobbying expenditures.^17  Other commentators have identified limitations in the SEC’s ability to address deficiencies in state law through its rule-making authority.^18  Although an analysis of the SEC’s institutional competence is beyond the scope of this Article, institutional characteristics such as expertise, the potential for industry capture, the extent of agency independence versus susceptibility to political influence, and the explicit and implicitly delegated scope of rule-making authority are all relevant to this issue.  Finally, commentators have recently highlighted the growing albeit indirect federalization of fiduciary duty law by the federal courts in the context of federal securities fraud litigation.^19  Hillary Sale and Robert Thompson argue

^16  Roberta Romano, The Genius of American Corporate Law 76 (1993).

^17  Id.

^18  See, e.g., J. Robert Brown, Jr., The Irrelevance of State Corporate Law in the Governance of Public Companies, 38 U. Rich. L. Rev. 317, 321 (2004) (describing as “unsuccessful” the SEC’s efforts to compensate for deficiencies in state laws concerning corporate governance).

^19  Robert B. Thompson & Hillary A. Sale, Securities Fraud as Corporate
Governance: Reflections upon Federalism, 56 Vand. L. Rev. 859 (2003).

that the enforcement of federal securities law through securities fraud class actions has “become the most visible means of regulating corporate governance.”^20  They then identify as the key question posed by their results whether the existing allocation of corporate governance is desirable or whether “whether we should proceed to regulate corporate governance more directly at the federal level.”^21

^20  Id. at 860.

^21  Id. at 910.

	B.  Efficiency in corporate law – Maximization of Shareholder Wealth
	The debate over regulatory competition in corporate law seeks to address the question of whether the existing regulatory structure produces efficient legal rules.  As Fischel and Easterbrook ask: “Is corporate law efficient or not?^22  Accepting, for the purposes of this Article, that efficiency is the appropriate metric by which to evaluate corporate law, the appropriate definition of efficiency remains somewhat unclear.  From a societal standpoint, efficient legal rules are those that maximize aggregate social welfare.^23  Lucian Bebchuk correctly observes that, because “a given corporate law issue ... implicates not only the interests of shareholders, but also those of third parties . . . . these [third party] interests must be taken into account in arriving at the socially optimal rule.^24  Corporate scholars have typically viewed corporate law as private law, however, and focused on corporate or firm value.  Moreover, for reasons that will be developed further below, corporate law scholarship has largely equated firm value with shareholder value.  Accordingly, corporate scholars typically define the corporation’s objective as maximization of shareholder wealth.^25  Scholars evaluate regulatory choices in terms of their impact upon a shareholder-based component of corporate value such as profitability, stock price or Tobin’s Q.^26  Efficient corporate laws are those that maximize shareholder value.

^22  Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 212 (1991).

^23  See, e.g., A. Mitchell Polinsky, An Introduction to Law and Economics 7-10 (1983).

^24  Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 Harv. L. Rev.1437, 1485 (1992).

^25   See, e.g., Bernard Black and Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 Harv. L. Rev. 1911, 1920 (1996) (describing function of corporate law as “maximizing the value of corporate enterprises to investors and therefore (on the whole) to society”); see also Michael Bradley, Cindy A. Schipani, Anant K. Sundaram and James P. Walsh, The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads, 62 Law & Contemp. Probs. 9 (1999); Roberta Romano, The Political Economy of Takeover Statutes, 73 Va. L. Rev. 111, 113 (1987) (describing “the maximization of equity share prices [as] the core goal of corporation law”).

^26    Standard market efficiency analysis suggests that, in general, there should be no meaningful difference between measuring corporate performance in terms of a performance-based variable such as profitability or a shareholder return variable such as stock price, because, in an efficient market, stock price should reflect an issuer’s profitability.

	The empirical literature incorporates this methodology.  Thus in their efforts to evaluate the efficiency of Delaware law relative to that of other states, both Rob Daines and Guhan Subramanian looked to the effect of Delaware incorporation on Tobin’s Q – the ratio of firm’s stock market value to the book value of its assets.  Similarly, Gompers, Ishii and Metrick argued that the statistical relationship between their governance index and Tobin’s Q demonstrated the inefficiency of firm takeover defenses.  Other commentators have used event studies to capture the effect of regulatory changes on firm value.  For example, in evaluating legislative adoption of director exculpation statutes, Michael Bradley and Cindy Schipiani looked at changes in firm stock price and concluded that director exculpation statutes inefficiently lowered firm value.^27   Still other studies focus on accounting profitability.  Thus, in seeking to determine whether greater board independence produced “better corporate performance,” Bernard Black and Sanjai Bhagat looked at a range of accounting variables.^28   Regardless of the precise variable selected, in each case, the purpose of the empirical research is to measure the efficiency of particular corporate law rules.  Whether the rules are the product of statutes, judicial decision-making or individual firm choice, the studies evaluate their efficiency by reference to their effect on shareholder value.  Accordingly, the empirical studies conclude that the efficient rules are those that are correlated with higher returns to shareholders.  

^27  Michael Bradley & Cindy A. Schipani, The Relevance of the Duty of Care Standard in Corporate Governance, 75 Iowa L. Rev. 1 (1989); Michael Bradley & Cindy A.  Schipiani,  The Economic Importance of the Business Judgment Rule: An Empirical Investigation of the Trans Union Decision and Subsequent Delaware Legislation, in The Battle for Corporate Control105 (Arnold N. Sametz ed., 1991) (finding that the passage of § 102(b)(7) actually lowered the value of Delaware corporations)

^28  Sanjai Bhagat & Bernard S. Black, The Non-Correlation between Board Independence and Long-Term Firm Performance, 27 Iowa J. Corp. L. 231, 241-42 (2002).  Bhagat and Black also looked at stock price performance but recognized some of the limitations of this approach.  See id. at 242.

	Shareholders, however, are not the only participants in the corporation.  Corporations produce value not simply for shareholders, but also for a variety of non-shareholder groups, including management, employees, creditors, customers, and suppliers.  A corporation provides value to its creditors in the form of interest payments on its debt.  It provides value to management and other employees through the provision of jobs resulting in compensation, fringe benefits and, in some cases, the development of specialized skills or marketable reputations.  A corporation’s products provide value to its customers who engage in voluntary surplus-producing market transactions.  A corporation similarly produces value to its suppliers.  Corporations may also provide value to the communities in which they are located, through the property taxes that they pay, the services they provide, even the charitable activities in which they engage.  
	By measuring efficiency in terms of shareholder wealth, the methodology of the empirical studies explicitly excludes the effect of regulatory changes on non-shareholder constituencies within the corporation.  The value that a corporation produces and distributes to its stakeholders in the form of salaries, interest payments, charitable contributions and so forth, is subtracted from the corporation’s pre-tax revenues.  Thus, this stakeholder value is not incorporated into the calculation of corporate profits.  Similarly, because it is distributed to non-shareholder stakeholders, it does not affect shareholder returns.  As a result, non-shareholder value does not make its way into the empirical assessments of firm value that scholars use to evaluate the efficiency of corporate law.
	The implications of this omission are simple.  Empirical studies may identify as efficient regulatory changes that transfer wealth to shareholders from non-shareholder groups.  At the same time, empirical studies may fail to identify as efficient regulatory changes that increase value primarily for non-shareholder stakeholders.  The studies essentially reject the position that efficiency in corporate law is a function of aggregate firm value; instead they reflect the view that the shareholders’ portion of the pie is the only relevant consideration.
	The dominance of shareholder wealth maximization in empirical studies of the efficiency of corporate law can be explained in several ways.  A combination of practical considerations operate in favor of relying on shareholder wealth.  Because corporate and securities law focus on the role and the rights of investors, scholars may believe that the impact of changes in corporate law on the value of non-shareholder interests is relatively minor and may be disregarded for purposes of their analysis.  Data on shareholder wealth, particularly changes in market capitalization, are also easy to obtain.  Although empirical research could probably incorporate a reasonable measure of creditor value, based on something like the market value of publicly traded corporate debt, neither the legal nor the financial literature has developed standardized measures of employee value, customer value, and so forth.  
	Moreover, researchers may believe that shareholder value is a reasonably good proxy for firm value.  Traditional economic analysis suggests that decisions that maximize shareholder value are likely to maximize firm value.  If maximizing shareholder value leads to efficiency from the perspective of all the firm’s stakeholders, or society generally, than shareholder value is an appropriate metric for assessing the efficiency of legal rules.   If shareholder value is closely correlated with firm value, than there is little reason to seek to incorporate a more complex measure of firm value.
	The problem with applying this reasoning to empirical assessments of corporate regulation is that the central focus of corporate law is to address the conflicts of interest among the various corporate constituencies.  Reinier Kraakman and his co-authors highlight this point in their recent book, The Anatomy of Corporate Law.^29  Kraakman, et al., explain that the dominant purpose of corporate law is to address the agency problems created by conflicts of interest between shareholders and management, between controlling and minority shareholders, and between shareholders and other stakeholders.^30  This characterization of corporate law reveals a problem in using shareholder value to evaluate the efficiency of corporate law.  It is precisely in situations involving a conflict of interest between corporate stakeholders in which an increase in value to one stakeholder group may result from costs imposed on another stakeholder group rather than net increases in the size of the corporate pie.  Shareholder value is not an appropriate measure of the efficiency of rules that allocate value between shareholders and other stakeholders.  

^29  Kraakman, et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (2004).

^30  See David A. Skeel, Jr., Corporate Anatomy Lessons, 113 Yale L.J. 1519, 1528-29 (explaining and evaluating Kraakman’s characterization).

	Whether or not one agrees with Kraakman, et al.’s characterization of agency issues as the central focus of corporate law, it is clear that such agency issues are the focus of many of the empirical studies of corporate law.  Takeover regulation is perhaps the most dramatic example of legal rules that allocate firm value among shareholders, employees, and other corporate constituencies.  Indeed, some commentators have explicitly defended antitakeover regulation as necessary to respond to the appropriation of value by shareholders from other corporate stakeholders.  If shareholder gains from takeovers come as the result of losses imposed on employees or creditors, an empirical study that seeks to evaluate the efficiency of an antitakeover regulation by looking at its effect on stock price is clearly incomplete.  Instead, efficiency would require the study to determine the net effect of the regulation on firm value.  
	Alternatively, one might respond by rejecting the claim that the efficiency of corporate law is or should be measured by reference to aggregate firm value.  Some scholars have argued that shareholder value is the normatively appropriate focus of corporate law, and that the interests of other corporate stakeholders are better addressed through other bodies of law such as labor law, consumer law, and so forth.^31  If corporate law does or should focus exclusively on shareholder value, then the empirical literature is not using shareholder value as a proxy for firm value, but rather is focusing on the appropriate efficiency metric.  Accordingly the next section considers the shareholder primacy norm and the claim that efficiency in corporate law should be defined by reference to shareholder wealth.

^31  See, e.g., Henry Hansmann and Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439 (2001).

	II.  The Shareholder Primacy Norm 
	A.  Origins of the Norm
	The focus on shareholder wealth in evaluating corporate law is based on the norm of shareholder primacy.  Shareholder primacy, the obligation of corporate decision-makers to focus on shareholder interests, is a dominant principle in corporate law.^32  As the court explained in the textbook staple Dodge v. Ford Motor Corp.: “A business corporation is organized and carried on primarily for the profit of the stockholders.”^33  Although some scholars, most notably progressive scholars, have questioned whether the norm is either descriptively accurate or normatively appropriate, the vast majority of commentators accept the premise that the primary objective of the corporation is to maximize shareholder wealth. 

^32  As Steve Bainbridge has observed, shareholder primacy actually encompasses “two distinct principles: 1) the shareholder wealth maximization norm . . . and 2) the principle of ultimate shareholder control.  See Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw.U. L. Rev. 547, 573 (2003).  In his analysis of director primacy, Bainbridge focuses on the second principle and does not discard the principle of shareholder wealth maximization.  Id. at 574.

^33  204 Mich. 459, 170 N.W. 668 (Mich. 1919).

	The origins of the shareholder primacy norm can be found in the classic debate between Merrick Dodd and Adolf Berle in the 1930, at the time that the U.S. corporation was expanding from an organization form used primarily for public work – building and operating railroads, ferry services, bridges and the like – to the foundational form for private business enterprise.  Berle and Dodd were actually debating two related questions – how properly to characterize the developing structure of corporate law and, relatedly, how corporate law should develop in the future.  Thus Berle, who espoused the conception of shareholder primacy in the debate, argued that corporate law was essentially a variant of trust law, in which corporate mangers owed fiduciary duties to manage the corporation in the interests of the shareholder-beneficiaries.^34  Berle’s claim was primarily descriptive: “all powers granted to a corporation or to the management of a corporation . . . are . . . exercisable only for the ratable benefit of all shareholders as their interest appears.”^35  Berle’s argument was essentially premised on the conception of shareholders as owners of the corporation.  Managers’ obligations to shareholders stem from their role as trustees or agents.

^34  Adolf Berle, Corporate Powers as Powers in Trust, 44 Harv. L. Rev. 1049 1074 (1931).

^35  Id. at 1049.

	Dodd responded with the essentially normative and largely aspirational argument, that managers “should concern themselves with the interests of employees, consumers, and the general public as well as of the stockholders. . . .”^36  Dodd’s argument sought to distance corporate or business law from private law, claiming that public opinion was moving the law toward a view in which the business corporation has “a social service as well as a profit-making function.”^37  At least for a period of time, corporate law came to adopt Dodd’s position, granting managers wide discretion to manage the corporation in the general interests of society.^38

^36  Merrick Dodd, For Whom are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1156 (1932).

^37  Id. at 1148.

^38   See Hansmann & Kraakman, supra note  at 444 n. 6 (describing Berle’s subsequent statements on the issue).  See also Adolf Berle, Foreword, The Corporation in Modern Society xii (E. Mason ed. 1959) (conceding that corporate law had developed to be consistent with Dodd’s position but maintaining his misgivings about whether this was the “‘right’ disposition.”).

	A variety of commentators base their defense of shareholder primacy on the legal status of shareholders as owners of the corporation.^39  This argument defense has increasingly lost favor, leading Lynn Stout to characterize it recently as “the worst, of the standard arguments for shareholder primacy.”^40  Such a defense is weakened by the substantial legal and practical differences between shareholders and traditional property owners.^41  From a legal perspective, shareholders own stock, which gives them claims to certain control and financial rights within the corporation but not direct control over or even access to the firm’s underlying assets.  Other stakeholders, including creditors, options holders and managers have claims to different control and financial rights.  From a practical perspective, shareholders also do not resemble traditional owners.  They are a fluid and fluctuating group of investors.  Many are short term participants in the corporate enterprise.  Others hold stock as part of a diversified investment strategy in which they simply seek to obtain the market rate of return.  Large numbers of shareholders do not vote, do not read corporate disclosure statements, and do not maintain an ongoing interest in developments concerning their portfolio companies.  As a result, it seems inappropriate to privilege their claims by relying on a property rights conception of legal ownership.

^39  See Adolf A. Berle & Gardiner Means, The Modern Corporation and Private Property 9 (1932) (referring to  shareholders as “owners” and noting that corporate governance must focus on the problems caused by the separation of ownership and control); David  Millon, Redefining Corporate Law, 24 Ind. L. Rev. 223, 229-30 (1991) (explaining idea that shareholders hold corporations as property).

^40  Lynn A. Stout, Bad and Not-so-bad Arguments for Shareholder Primacy, 75 S. Cal. L. Rev. 1189, 1190 (2002).

^41  See, e.g., Margaret M. Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century 4-5 (1995) (describing as misleading the characterization of shareholders as owners).

	In the 1930s debates, Berle identified a key drawback to Dodd’s public law conception of managerial responsibilities.  Increasing management discretion in favor of other constituencies – so-called stakeholder capitalism –  would weaken management’s fiduciary obligations to shareholders.  This would have the effect, in Berle’s view, of making managerial power, “for all practical purposes absolute.”^42  Berle’s analysis provides an alternative normative foundation for shareholder primacy: as a basis for constraining management discretion and, ultimately, management self-dealing.  Similarly modern scholars have defended shareholder capitalism against arguments in favor of stakeholder interests by arguing that legal recognition of such interests is unmanageable.  First, imposing upon management fiduciary obligations to multiple stakeholders creates irreconcilable conflicts in the frequent situations in which the interests of those stakeholders conflict.  Second, legal endorsement of stakeholder interests has the practical effect of vesting management with largely irreviewable degree of decision-making discretion that is likely to increase agency costs.  The shareholder primacy norm, in contrast, provides an objective standard by which to evaluate operational decisions.

^42
  Adolf A. Berle, For Whom Corporate Managers are Trustees: A Note, 45 Harv. L. Rev. 1365, 1367 (1932).

	The imposition of trustee-like fiduciary duties, as Berle described, also offers a vehicle for enforcement of the shareholder primacy norm.  Shareholders can address deviations from shareholder primacy through derivative litigation against errant corporate decision-makers.  Today, the shareholder derivative suit enforces the use of fiduciary principles as a constraint on management decision-making, both to insure that management acts in furtherance of shareholder interests rather than its own and to limit management discretion to favor the interests of other corporate constituencies over the interests of shareholders.
	Concededly, shareholder capitalism only supplies a loose set of constraints on managerial discretion because there are a range of interests represented within the shareholder class.  Shareholders may differ in the temporal scope of their investment, the extent of their diversification and their willingness to bear risk.  Conflicts of interest between different shareholder groups limit the functionality of shareholder primacy as a decision-making constraint.
	B.  Shareholder Primacy and Existing Law
	Despite widespread academic endorsement of the shareholder primacy norm, it is unclear that existing law actually requires officers and directors to make operational decisions in an effort to maximize shareholder wealth.  Although Delaware law is generally described favoring the interests of shareholders relative to the law of other states, the Delaware statute does not explicitly require that a corporation be managed exclusively or even primarily in the interests of its shareholders.  Indeed, the Delaware statute is silent both with respect to the standard by which management decisions are to be evaluated and with respect to the stakeholders whose interests may legitimately be taken into account.  	Delaware case law is similarly ambiguous.  Although shareholder primacy advocates point to the language of cases like Dodge v. Ford, there is a surprising absence of modern precedent explicitly requiring management to maximize shareholder value.  Concededly the Revlon decision requires the directors, in the context of a cash sale of the company, to obtain the highest possible selling price.^43  But the Revlon decision is limited to the corporate control context and, even within that context, applies to an extremely limited set of cases.  

^43  Revlon, Inc. v. MacAndrews  & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

	In the operational context, the business judgment rule affords management ample discretion to consider the interests of other stakeholders.  Delaware courts have described the business judgment rule as imposing an obligation to act “in the best interests of the company.”^44   Even in the takeover context, so long as the company has not entered the Revlon mode, Delaware law permits directors to consider the interests of “creditors, customers, employees, and perhaps even the community generally.”^45  As the court explained in Paramount Communications Inc. v. Time Inc.: “[A] board of directors . . . is not under any per se duty to maximize shareholder value.”^46  Rather, Delaware appears to endorse the right, if not the obligation of directors to manage the corporation as a legal and economic entity.^47  

^44  Aronson v. Lewis, 473, A.2d 805, 812 (Del. 1984).

^45  Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985).

^46  571 A.2d 1140, 1150 (Del. 1989).

^47  See, e.g., William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14 Cardozo L. Rev. 261 (1992).

	Moreover, it is important to distinguish two concepts in Delaware case law.  The Delaware courts have explicitly rejected the argument that management has a fiduciary obligation to other stakeholders at the expense of shareholders, at least so long as the corporation is not operating in the vicinity of insolvency.  Fiduciary obligations, enforceable through derivative litigation, operate only in favor of shareholder interests.  The exclusivity of fiduciary duties to shareholders does not, however, mandate shareholder primacy.  Similarly, the cases that reject stakeholder claims for breach of fiduciary duty do not contain anything preventing management from favoring stakeholder interests; they simply provide that management’s failure to favor such interests is not judicially remediable.  
	States other than Delaware have endorsed broader conceptions of firm value for the purposes of managerial decision-making.  The majority of states have adopted corporate constituency statutes which explicitly authorize directors to consider the interests of non-shareholder stakeholders.^48  Although these statutes were adopted in response to hostile tender offers and several are limited to the change control context, the vast majority apply to all corporate decisions.  In many cases, the statutes explicitly provide that directors will not be required to the effects of a corporate decision on any particular group – including shareholders – as a dominant factor.^49  As former SEC Commissioner Al Sommer has observed, the salient point of these statutes is that they define the best interests of the corporation in terms of the interests of both shareholders and non-shareholder stakeholders, thereby omitting any requirement that decisions favoring non-shareholder stakeholders be justified in terms of a nexus to shareholder value.^50

^48  See Guhan Subramanian, The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on the "Race" Debate and Antitakeover Overreaching, 150 U. Pa. L. Rev. 1795, 1801 (2002) (identifying thirty-one states that have adopted corporate constituency statutes).

^49  See Ind. Code 23-1-35-1.

^50  A. A. Sommer Jr., Whom Should the Corporation Serve? The Berle-Dodd Debate Revisited Sixty Years Later, 16 Del. J. Corp. L. 33, 42 (1991).

	It is true that the statutes – other than that of Connecticut – do not require directors to favor other stakeholders, nor do they impose fiduciary obligations on directors in favor of non-shareholder constituencies.  Nonetheless, the plain language of the statutes is inconsistent with the shareholder primacy norm.  In some cases, statutory provisions extend even further.  For example, the New York corporation statute authorizes corporations to make charitable donations “irrespective of corporate benefit.”^51  There is also ample case law rejecting an affirmative obligation on the part of directors to sacrifice the interests of other constituencies in order to maximize shareholder wealth.  As the court explained in GAF v. Union Carbide Corp.,^52 the board must balance investors interests, on the one hand, and “the legitimate concerns and interests of employees and management . . . on the other.”^53

^51  N.Y. B.C.L. § 202(a)(12).   Similarly, the Delaware Supreme Court, in Kahn v. Sullivan, 594 A.2d 48 (Del. 1991), held that the appropriate standard to be applied in reviewing a corporate charitable donation was whether the donation constituted waste.

^52  624 F. Supp. 1016, 1018 (S.D.N.Y. 1985).

^53  Id. at 1019-20.

	Commentators have suggested that, in practice, the shareholder primacy norm is even less influential.  Lynn Stout has argued that the business world itself seems to favor director primacy over shareholder primacy, and that both law and practice condone a variety of standard practices – options repricings, retroactive increases in employee retirement benefits, and corporate charitable contributions –  in which shareholder interests are subordinated to those of other stakeholders.^54  Thus, there are reasons to question the validity of the shareholder primacy norm both as a matter of legal obligation and existing corporate practice.

^54  See Stout, supra note , at 1202-03.

	C.  The Normative Foundations of Shareholder Primacy
	What explains the seeming disconnect between explicit legal doctrine and academic theory?  Many law and economics scholars defend shareholder primacy not by reference to some legal or theoretical conception of shareholder status but from a contractual perspective.  Normatively, if the corporation is a private enterprise in which the interests of its stakeholders are defined by their contractual agreements, the efficiency of legal rules should be measured by the extent to which they maximize the achievement of the parties’ contractually specified objectives.
	Contractarian scholars describe the corporation as a hypothetical contract.^55  Shareholders provide capital and other stakeholders provide other inputs, such as labor.  Non-shareholder stakeholders implicitly or explicitly bargain for priority over shareholders in exchange for receiving a fixed claim.  Shareholders then, implicitly or explicitly bargain for the residual or surplus – what is left over after the fixed claimants are paid. The bargain makes sense only if management has some obligation to make decisions that are expected to maximize the surplus left over for the shareholders.  

^55  See, e.g., Frank H. Easterbrook & Daniel R. Fischel, The Corporate Contract, 89 Colum. L. Rev. 1416, 1418 (1989) (describing the corporation as “a complex set of explicit and implicit contracts”).

	If shareholder primacy is part of the implicit bargain among all corporate participants, it is interesting that shareholders have not succeeded in making it an explicit contractual term, either through legislation or in the corporation’s charter.  Nonetheless, there are reasons that shareholder primacy makes sense.  First, it is a partial substitute for the priority that other stakeholders enjoy.  A bargain in which one receives only the surplus left over after other claims is of little benefit if the other participants in the venture have no obligation to generate any surplus.  Second, shareholders are passive investors.  Through their control, other stakeholders, particularly management, can protect their priority interests directly.  Third, shareholder primacy serves as a gapfiller.  A contract that would fully specify management’s decision-making obligations with respect to shareholders would be impossibly complex and arguably too inflexible to respond to developments in the business world.  Finally, and perhaps most importantly, shareholders cannot withdraw their investment from the corporation without substantial sacrifice.  Managers, employees, creditors and suppliers provide input to the corporation on an ongoing basis.  Thus market forces constrain the corporation’s ability to exploit these stakeholders in addition to explicit contract terms.  In contrast, a shareholder provides permanent capital to the corporation.  Although shareholders can exit the corporation if their interests are not adequately protected, they can do so only by selling their shares to another investor.  As a result, they will bear the costs of misdeeds or self-dealing by other stakeholders even if they exit. 
	This effect is demonstrated in cases in which states of have adopted extreme antitakeover legislation.  Several states have adopted antitakeover statutes that are widely viewed as extreme, incluidng Ohio, Massachusetts and Pennsylvania.^56  Commenators widely agree that these statutes harm shareholders by 1) reducing the ability of the takeover market to discipline management decision-making; and 2) making a takeover, with its likely premium for shareholders, less probable.  These effects are borne out by empirical work, which shows a negative impact on stock price.  The stock price of affected firms drops because the market anticipates the effect of these harms on the future value of the stock.  Significantly, however, existing shareholders in these firms are the group that suffers the harm from the legislation, and shareholders cannot avoid the harm through exit.

^56  See Bebchuk et al., supra note , at 1804-5.

	It is important to distinguish these justifications for shareholder primacy from the economic theory that shareholder capitalism leads to maximum firm productivity.  The economic theory behind shareholder primacy is that, because shareholders receive the firm surplus, maximizing shareholder wealth means maximizing this surplus, and thus corporate decisions should be made to maximize shareholder wealth.  This analysis is incomplete.  Although decisions that maximize the corporate surplus have the effect of maximizing aggregate firm value, this does not require that shareholder receive all or even a portion of that surplus.  So long as corporate decisions are made in the interests of the residual claimant, such decisions will maximize the surplus and thus maximize aggregate firm value.
	The claim that managing the corporation in the interests of the residual claimants is most likely to maximize corporate value has been disputed.^57  Jeffrey Gordon has observed that the argument that maximizing shareholder value will maximize firm value depends on strong assumptions about the operation of the various markets in which the firm participates, including the capital market, the labor market and the product market.^58  He is currently testing empirically the relationship between shareholder value and a broader conception of firm value or surplus.^59  Moreover, particularly when a corporation is in financial difficulty, shareholders will prefer high risk decisions that may not maximize expected firm value.^60  A “bet the firm” investment may offer the greatest chance of producing some surplus value for shareholders, but at the risk of wiping out any potential value to other claimants.  Within that context, the interests of shareholders may be directly

^57  See, e.g., Thomas A. Smith, The Efficient Norm for Corporate Law: A Neotraditional Interpretation of Fiduciary Duty, 98 Mich L. Rev. 214, 221 (1999) (arguing that “the shareholder value maximization norm, if strictly applied, would require firm managers to make socially inefficient choices”); Stout, supra note , at 1197-98 (demonstrating how shareholder primacy can lead to inefficient outcome).

^58  See Jeffrey N. Gordon, The Shareholder Wealth Maximization Hypothesis: An Empirical Test
Using an Airline Industry Example (working paper dated Nov. 2002).

^59  Id.

^60  Smith, supra note , at 221-224 (offering example of inefficiently risky investment and then extending the analysis beyond the “vicinity of insolvency).

 in conflict with the interests of other corporate constituencies such as creditors and employees.  Thus the shareholders have an incentive to shift assets to unduly risky claims, benefitting themselves at the expense of fixed claimants.^61

^61  See Jonathan R. Macey & Geoffrey P. Miller, Corporate Governance and Commercial Banking: A Comparative Examination of Germany, Japan, and the United States, 48 Stan. L. Rev. 73, 77 (1995) (explaining why equity holders have an incentive to shift assets to risky investments and how this shift constitutes a transfer of wealth from the fixed to the residual claimants).

	Moreover, as Thomas Smith has argued, it may not be realistic to focus on the narrow interests of hypothetical long term shareholders even if the agreed objective is the maximization of investor welfare.  If the modern investor owns a diversified portfolio of investments, including debt and equity, he or she should rationally prefer the firm to be managed in a way that maximizes the aggregate return to capital.  
	Even if economic theory supports managing the firm in order to maximize the interests of the residual claimant, arguably any of the firm’s stakeholders could serve as the residual claimant, and firm surplus could be directed toward those stakeholders rather than to the shareholders.^62  Managers and employees could receive surplus through bonuses, for example.  Customers could receive the firm’s surplus through price cuts or rebates.    Indeed, as Henry Hu observes, out of the money call option holders, who have a claim quite different from the type of ownership stake recognized by traditional property rights, are in fact the ultimate residual claimants.^63

^62  Stout argues that non-shareholder stakeholders are accurately described as residual claimants, along with shareholders in the sense that they enjoy extra-contractual benefits when the corporation does well and suffer along with shareholders when the corporation does poorly.  Stout, supra note , at 1194.

^63  Henry T.C. Hu, New Financial Products, the Modern Process of Financial Innovation, 
and the Puzzle of Shareholder Welfare, 69 Tex. L. Rev. 1273 (1991).

	Within the framework of the contractual model, it is possible to posit alternatives to shareholder capitalism simply by arguing that shareholders have not bargained for the corporate surplus at all, but simply for a market rate of return on their investment.  The higher return on equity adequately compensates shareholders for the lower priority and higher risk that they assume, and any additional compensation through a share of the surplus is simply a windfall.  The reasoning that shareholders need not be residual claimants is at the core of the progressive model of corporate law, which rejects shareholders’ exclusive claim to the corporate surplus.  Similarly, Lynn Stout and Margaret Blair argue that under the team production model of corporate law the board of directors should manage the corporation in an effort to maximize the sum of the risk adjusted returns enjoyed by all the corporation’s stakeholders.^64

^64  See, e.g., Margaret M. Blair and Lynn A. Stout, A Team Production Model of Corporate Law, 85 Va. L. Rev. 247 (1999).

	Similar reasoning could be used to defend a model of managerial capitalism.  Although this model is seemingly considerably afield from existing legal theory, it is fairly consistent with evidence of recent corporate decisions in which managers seem to receive extraordinarily high compensation packages.  Management’s compensation seems high as a fixed market-based rate of payment for services, but not as a share of the corporate surplus remaining after shareholders have received their market rate of return.  Moreover if shareholders have bargained for a market rate of return, perhaps managers have a legitimate claim to this surplus.^65  From an economic standpoint, it may well be rational to structure corporations according to a managerial capitalism model.  Significantly, one could argue that corporate surplus is produced primary as a result of effective management decisionmaking.  By allowing managers to enjoy the surplus that they produce, managerial capitalism eliminates the standard agency problem in corporate law and perfectly incentivizes management to maximize firm productivity.^66		

^65  Alternatively, recent increases in managerial compensation may reflect shifts in the operational decision-making of the corporation in favor of greater risk taking.  See, e.g., Marcel  Kahan and Edward B. Rock,  How I Learned to Stop Worrying and Love the  Pill:  Adaptive Responses to Takeover Law, 69 U. Chi. L. Rev. 871, 898 (2002) (describing the evolution of the poison pill together with shifts in executive compensation during period after pill was developed).

^66  Cf. Hansmann & Kraakman, supra note  (arguing that managerial capitalism has been correlated with reduced productivity).  Managerial capitalism may also be inconsistent with existing doctrinal limits on management self-dealing.

	There are legitimate questions about the efficiency of managerial capitalism from a societal perspective.  Managerial capitalism may create excessive incentives for managers to engage in self-dealing or, conversely, may lead managers to sacrifice productivity in favor of reducing corporate risk-taking.  Moreover it may be necessary to assess management decisions from the perspective of shareholder value in order to provide accountability.  Shareholder primacy may be an appropriate legal criterion for constraining management discretion even under a holistic conception of firm value that extends beyond shareholder wealth maximization.  That is, the legal requirement that management maximize shareholder value is not the equivalent of regulatory judgment that shareholder value is the only value worth recognizing within the corporation.  At a minimum, it seems plausible that, from an efficiency perspective, the primary concern should be maximizing the aggregate value of the firm.  Questions about the appropriate division of that value should be subsidiary.
III.  The Implications for comparative institutional analysis
	A.  The role of shareholder primacy in comparative institutional analysis
	Why explore the normative foundations of shareholder primacy?  The answer is that efficiency assessments of regulatory competition in corporate law rely on empirical analyses of regulatory efficiency, and those analyses, in turn, incorporate a foundational assumption of shareholder primacy.  Because the studies accept without question that the appropriate objective of corporate law is to maximize shareholder wealth, they premise their conclusions about the appropriate regulatory policy on shareholder wealth effects.  The focus on shareholder wealth leads to conclusions about efficiency that may be driven by regulations that transfer value among stakeholder groups rather than policies that increase true firm productivity.
	These conclusions are used to support arguments about the most appropriate regulatory design.  Indeed, within the sphere of regulatory competition, institutional analysis has focused upon the ability of shareholders to participate effectively in the rule-making process relative to other corporate stakeholders, particularly corporate management.  State charter competition and the dominance of Delaware law are both defended in terms of their ability to protect shareholder interests.  Although these conclusions may be supported by empirical data on the shareholder wealth effects of Delaware law, they cannot be extended to a general defense of the efficiency of Delaware law absent a strong normative defense of shareholder primacy.		
	Indeed, the failure of empirical studies systematically to incorporate stakeholder value suggests that important information is missing from the regulatory prescriptions that these studies offer.  In the takeover context, this conclusion is obvious - an empirical study that measures the shareholder wealth effect of a staggered board has not considered whether a loss to shareholders is offset by gains to creditors, workers, officers or directors.  Outside the takeover context, however, the same analysis holds.  Thus, although shareholders might benefit from compensating executives with stock options due to a reduction in agency costs, the executives might value the options at far less than their market value due to the increased risk, particularly because the risk magnifies their inability to diversify the firm specific risk associated with their position.  In turn, the executives might be driven to manage the firm in a way that maximizes short term stock market gains (average CEO tenure), leading to problems for lower level employees.  Suppliers might suffer through less favorable contract terms because provisions allowing for return of unsold product have to be disclosed in financial statements and affect stock price.
	Similarly, shareholder primacy privileges shareholder participation in the law-making process. In contrast a holistic or aggregate conception of firm value validates the participation of non-shareholder stakeholders.  In particular, such a conception may legitimize the participation of managers as independent stakeholders rather than solely as (faulty) shareholder agents.  Thus the identification of an appropriate efficiency metric is a key component of institutional analysis in corporate law because it determines the legitimacy of a given stakeholder’s participation in the lawmaking process. 
	B.  Institutional Analysis Under the Shareholder Primacy Norm
	As indicated above, comparative institutional analysis in corporate law has typically pitted the role of shareholders in the institutional process against the role of management.  In his concern over the race to the bottom, for example, Cary observed that management effectively chooses the state of incorporation.  Other commentators have identified the ability of management to lobby state legislatures and obtain favorable regulatory changes, such as the adoption of state antitakeover statutes.  Thus, particularly if corporate law is concerned about the agency problem between shareholders and management, the lawmaking structure creates a particular risk that management will dominate the process and obtain rules that allow it to exploit the shareholders.
	The standard public choice considerations affect comparative institutional analysis in corporate law.  Public company stock in the United States is owned, directly or indirectly, by dispersed small shareholders.^67  Small stakes and collective action problems limit the effectiveness of investors, particularly in a forum such as a legislature in which the reputation and experience of repeat players is a major factor in their effectiveness.  Cost considerations and their own political vulnerability limit the ability of even instituitonal investors with comparatively larger stakes to overcome these problems.  Additionally, because much corporate law is enacted at the state level, shareholders lack even the minimum political power that they might otherwise be able to exert through the voting process.  Although Delaware supplies corporate law to more than half of all publicly traded companies, few investors have the power to vote on the election of Delaware legislators.  

^67  Even the growth in institutional shareholder does not change this, as most institutions such as pension and mutual funds are simply vehicles through which small investors hold stock indirectly.

	In contrast, managers have substantial firm-specific stakes that make political activity rational. Corporations, pay substantial yearly franchise taxes to Delaware – revenue that Delaware risks losing if its corporate law fails to remain attractive to corporate management.  Corporations also provide substantial revenue to key interest groups in the creation of corporate law, such as Delaware corporate lawyers, through the consumption of legal services.  In addition, managers may exploit their firm’s political capital for their personal benefit.  
	Arguably the disparity in access between managers and shareholders is even greater with respect to federal law.  Roberta Romano has argued, for example, that Congress is even more likely than state legislatures to respond to interest group pressure.^68  Because interest groups such as managers, corporate lawyers and securities analysts are small in size and have concentrated stakes, they are able to dominate the regulatory agenda and obtain legislation that favors their interests over those of dispersed investors.  Romano identifies the Williams Act and mandatory disclosure as examples of this type of regulation.^69

^68  Romano, supra note

^69  Id.

	Consequently, public choice analysis suggests that corporate legislation is unlikely to serve the interests of investors relative to managers.  Shareholders may similarly be disadvantaged in the legislative process relative to other stakeholders.  Labor, suppliers and other businesses, customers, and community members all have the ability to participate in the political process.  Other corporate stakeholders may have particular advantages in political participation relative to shareholders.  Their interests may be aligned along a range of political issues.  They may be repeat players.  They may have greater stakes. Union lobbying and use of political action committees has enabled labor to develop a powerful political presence.  The Teamsters, for example, is one of the most powerful interest groups in Washington politics.  Corporate creditors and suppliers have the concentrated stakes and traditional resources of business interests.^70  Consumers have increasingly been able to exert political pressure through organizations such as AARP and through the potential voting power that they command.

^70  Note, for example, the range of explicit statutory protections for the interests of creditors, such as restrictions on dividend payments and personal liability of directors for approving an illegal dividend.

	Some commentators such as Romano and Easterbrook and Fischel rely on this analysis to favor a market dominated approach in which investors have the option of using the pressure of the capital markets to pressure issues to modify statutory default rules.  There are reasons to believe, however, that the market based contractual approach is also better suited to serving the interests of non-shareholder stakeholders than to protecting shareholder interests.  Contractual modifications can be used to adjust risk, priority, or fixed claims.  Thus employees might respond to a rule that reduced employee perks by demanding higher cash compensation.  Bondholders might respond to adjustments to the takeover market by demanding the right to approve changes in control or providing that such changes trigger a put option.  Fixed claims also simplify a stakeholder’s task in monitoring; the only monitoring required is to determine adherence to the contract terms.  The limited duration of many stakeholder interests enables participants to adjust the contractual terms to reflect interim legal or market changes at the time of new investments.  At the same time, most stakeholders can exit, either continuously or periodically, at relatively low cost.  The value of the stakeholder’s investment is only affected to a limited extent by its withdrawal from the corporation.
	In contrast, the ability to use contract terms to adjust a residual stake is inherently limited.  By definition, shareholders receive what is left over after the fixed claims of other stakeholders have been satisfied.  If their legal rights are reduced relative to those of other stakeholders, they will get less, but they cannot compensate for this by putting themselves ahead or getting a bigger up front piece.  Similarly, exit is of overstated value for shareholders.  True, shareholders can exit an underperforming corporation, but in the absence of a fraudulent cover-up, the price at which they can exit will reflect the corporation’s poor performance.  Relative to an employee, who loses only the value of firm-specific sunk costs, the shareholder loses more.
	I have argued elsewhere, that there are reasons to believe courts may also offer a superior alternative to both the legislature and the market for the production of legal rules that protect shareholder interests.^71  Courts are insulated from the financial and political pressure associated with the legislative process.  Moreover, the transparency of written opinions provides a level of accountability.  

^71  See Fisch, supra note .

	Moreover, shareholders have far greater access to the courts than to the legislatures.  The representative lawsuit, such as the shareholder derivative suit or securities class action, enables the small investor to obtain access to judicial lawmaking and allows the aggregation of small investor interests into substantial stakes while, at the same time, overcoming coordination and collective action problems (concededly there are substantial administrative costs imposed through the collection of legal fees).   In addition to the shareholder interests in a particular company, shareholders generally enjoy the deterrent effect of litigation on future self-dealing and other misconduct by corporate officers and directors.  
	In contrast, the access of non-shareholder stakeholders to judicial lawmaking is extremely limited.  This stems primarily from the judicial decisions that identify shareholders as the exclusive beneficiaries of management fiduciary obligations.  Despite the failure of both courts and statutes affirmatively to endorse the shareholder primacy norm, it is a fundamental principle of corporate law that, absent extraordinary circumstances,^72 non-shareholder stakeholders are not protected by fiduciary principles.  Only shareholders can bring a lawsuit to remedy, directly or indirectly, a director or officer breach of fiduciary duty.  Fiduciary principles thus define the scope of participation in the judicial lawmaking process and limit that participation to shareholders.  Other stakeholders cannot solicit broad judicial lawmaking but can only enlist the assistance of the courts to enforce explicit contractual or legal claims.  The absence of fiduciary protection operates as a gatekeeping mechanism that reserves judicial lawmaking for shareholders and directs other stakeholders to the legislatures and the markets.

^72  Creditors are protected with fiduciary duties when the corporation is in the “zone of insolvency.”  See, e.g., Credit  Lyonnais  Bank v. Pathe Communications, No. 12150, 1991 LEXIS 215 (Del. Ch. Dec. 30, 1991) (recognizing this protection).

	Experience supports the conclusion that judicial lawmaking is more responsive to shareholder interests than the lawmaking of other institutions.  Many of the most pro-shareholder corporate law rules have been adopted through judge-made lawmaking – the auction requirement of Revlon, Unocal’s requirement of heightened judicial review of management decision-making in the takeover context, and the various expansive interpretations of the private right of action for federal securities fraud.  Notably, where legislatures have responded to these rules, they have cut back on shareholder protection.  Examples of these cutbacks include congressional adoption of the PSLRA which cut back on the imposition of fiduciary principles through federal securities fraud litigation, the Ohio legislature’s rejection of the Unocal standard of fiduciary principles in the takeover context, and the adoption of other constituency statutes by a variety of states to dilute the shareholder primacy norm.
	Thus, from the shareholder’s perspective, we see institutional advantages to judicial lawmaking.  This conclusion is consistent with the empirical data described in Section I.  To the extent that empirical studies seek to evaluate the efficiency of corporate law in terms of shareholder primacy, the findings suggest that Delaware’s lawmaking, which includes both a heightened role for the courts and an expert and specialized judiciary, is tailored to increase shareholder welfare.
	C.  Institutional Specialization and Fiduciary Principles
	The foregoing analysis offers a broader perspective on the shareholder primacy norm.  Shareholder primacy, as we have seen, is primary a product of judicial lawmaking and academic commentary.  Corporate statutes do not explicitly require officers and directors to make operational decisions that favor shareholders over other stakeholders; indeed, other constituency statutes suggest just the opposite.  Shareholder primacy does, however, govern the scope of fiduciary principles, however, providing that shareholders, and not other stakeholders, can enlist judicial lawmaking to address problems of intra-stakeholder conflicts.  
	Shareholder primacy thus allocates institutional authority for protecting the interests of various corporate participants.  The markets and the political process generally function well with respect to corporate lawmaking – the interests of most corporate participants, including managers, employees, creditors, customers and suppliers, are protected through their access to those institutions.  Shareholders, however, are relatively disabled from using those institutions effectively.  As a consequence, shareholders are afforded an alternative institution – the courts.
	This analysis explains the limitation of fiduciary principles – and thus judicial access – to shareholders.  Shareholders are not protected because theirs are the only interests that count within the corporation.  Managers, customers, employees are people too, and empirical scholars should be wary of implicitly reflecting a normative perspective that shareholder value is inherently equivalent to firm value.  But, contrary to the claims of progressive scholars, the legitimacy of other stakeholder claims does not justify the extension of fiduciary principles to protect non-shareholder interests.  Rather the scope of existing fiduciary principles can be understood as a mechanism for institutional specialization — allowing the different institutions to serve the interests of different corporate participants.
	The analysis also explains some of the limitations on the scope of shareholder access to judicial lawmaking.  The reasons that shareholders require the special protection of the courts is because of limitations in their ability to obtain adequate protection through the market or the legislature.  In particular, the market is far more limited in its power to protect existing shareholders than future shareholders.^73  As a consequence, legal doctrines such as the contemporaneous ownership requirement in derivative litigation and the standing requirement in securities fraud litigation limit the scope of the right to engage judicial lawmaking.

^73  On the conflict between the interests of current and future investors, see Steven L. Schwarcz, Temporal Perspectives: Resolving the Conflict Between Current and Future Investors (working paper dated 6/7/04).

Conclusion
	The shareholder primacy norm is a powerful legal principle.  The norm is commonly understood as the normative claim that a corporation should be managed in order to maximize shareholder wealth.  It therefore follows, from this claim, that the efficiency of corporate law can be assessed by empirically measuring the effect of regulation on shareholder wealth.
	This article challenges that analysis.  The article demonstrates the support for shareholder primacy either as a description of existing corporate or a normative principles.  Instead, the article demonstrates that the shareholder primacy norm is properly understood as an interpretive principle for judicial lawmaking in the context of applying fiduciary principles.  Within this context, the shareholder primacy norm is justified because judicial enforcement of fiduciary duties is a mechanism that specifically addresses the limitations of other institutions to protect shareholder interests. 
	This article considers the relative ability of different lawmaking institutions to protect the interest of participants in the corporation.  After demonstrating the relative advantages of non-shareholder participants in protecting their interests through the legislatures and the courts, the article highlights the special role of the courts in protection of shareholder interests.  The shareholder primacy norm, enforced through fiduciary principles, remedies this imbalance by providing shareholders with access to judicial lawmaking.