STOCKHOLDERS AND STAKEHOLDERS :T HE BATTLE FOR CONTROL OF THE CORPORATION

Abstract

The American corporation is in trouble not only because of various immoral executives, but also because it is a target of sustained attacks. For several decades, corporate revisionists have toiled to transform the corporation from private to public property. Were they to succeed, the tragedy of the commons would slowly sap the corporation of its vitality. My objective in exposing the battle for corporate control is to urge and encourage those committed to the preservation of this highly performing institution to place the issue more prominently on their agenda. To this end, I detail the evolution of the battle and assess the present state of affairs. In so doing, I describe and critique theory, the revisionist's chosen weapon for gaining control of the corporation. Stakeholder theory currently dominates textbooks and syllabi of courses in business management, human resource management, marketing, and public policy. It colors the decisions of many corporate executives. And it controls the thinking in the majority of business ethics centers. Aware of its reach, I adumbrate a strategy for reversing the destructive inroads of stakeholder theory. The Threatened Corporation The corporations most endangered in this momentous property dispute are the private, publicly traded ones in which stockholders are owners (principals) and hired corporate officers are managers (agents). Board directors have the duty to oversee the agents. Agents and directors have a fiduciary duty of care to protect and increase the investment of owners. Directors have the added duty of loyalty to stockholders. Corporate law gives no detailed discussion of the obligations of directors to employees who are not officers in the company. However, corporate law does emphasize that every employee of the firm has the same fiduciary obligation to the corporation as do the officers. In the other direction, law grants that corporations may spend corporate earnings on nonbusiness related projects for the benefit of employees, the community or society at large, provided that such expenditures can be expected to advance the corporation's primary goal of making profits for stockholders. These traditional agreements on the nature of corporate relationships constituting the firm are in serious dispute. Inside and outside the corporation, corporate revisionists are seeking to disestablish the corporation as a privately owned, publicly traded entity. In its place, they seek to ensconce an institution publicly owned and controlled by political decision rather than by the market. Battle Inside the Corporation In many of today's corporations, managers are the revisionists. Throughout the cultural revolution of the 1960 and 1970s, managers and stockholders stood together rejecting stakeholder theory. Few corporate observers, other than Adam Smith (1776), would have thought that this solidarity would crumble or that managers would support actions to disenfranchise the stockholder and ultimately weaken the corporate institution itself. As control of the corporation separated from ownership, the controlling managers found themselves conflicted. As legal agents, they were to maximize profits for their stockholder principals; but, as individually rational agents, many tended to maximize benefits to themselves. In time, they began to divert stockholder wealth to stakeholders through higher compensation packages, more expensive perquisites, comfortable surroundings, and generous charitable contributions. Market for Corporate Control It is argued that if managers deviate too far from acting in the interests of stockholders, the market for corporate control will intervene and oust them. The market for corporate control, as explained by law professor Henry Manne in his 1965 article Mergers and the Market for Corporate Control, recognizes stockholders' power to replace underperforming managers with a team expected to gain greater wealth for the company. …

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 19 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.