Shareholder Wealth Maximization : Variations on a Theme

In the debate over whether a corporation’s primary purpose is to make money for shareholders or protect the interests of all stakeholders, including employees and customers, some argue that corporate law requires directors and corporations to serve primarily shareholder economic interests. This paper's review of the history of corporate law suggests otherwise. Analysis of the cases reveals that judges did not sanction “shareholder wealth maximization,” but used that rhetoric to legitimate management’s dominion. Early in the twentieth century, amidst the rise of the publicly held corporation, insisting that corporations maximize profit for their shareholders was a means of protecting minority shareholders’ interests against potential abuse of power by the control group. By midcentury, however, courts began using the rhetoric of profit maximization to balance growing entrepreneurial freedom with assurances to individual shareholders, who were typically invested for steady income, that their investments would remain gainful. As courts moved away from strict prohibition of conflict-of-interest transactions to the more relaxed fairness standard, summarily dismissing allegations of breaches of fiduciary duties, judges included statements in dicta about profits the defendant directors generated for their corporations. In the 1980s, just as corporations and financiers replaced the minority, individual shareholder as typical plaintiffs in corporate litigation, the Delaware courts, informed by modern finance theory, explicitly made share price an element of the fairness standard of review. Revlon’s memorable charge that directors must get “the best price for the stockholders at a sale of the company” was an application of this standard. Since Revlon, shareholder wealth maximization has remained a powerful tool of assuring shareholders that corporations are run for their benefit while simultaneously guaranteeing corporate managers’ freedom, in fact providing directors with rhetoric to justify their actions