The Corporation Reborn: From Shareholder Primacy to Shared Governance

The consensus around shareholder primacy is crumbling. Investors, long assumed to be uncomplicated profit-maximizers, are looking for ways to express a wider range of values in allocating their funds. Workers are agitating for greater voice at their workplaces. And prominent legislators have recently proposed corporate law reforms that would put a sizable number of employee representatives on the boards of directors of large public companies. These rumblings of public discontent are echoed in recent corporate law scholarship, which has cataloged the costs of shareholder control, touted the advantages of nonvoting stock, and questioned whether activist holders of various stripes are acting in the company’s best interests. Academics who support stronger share-holder rights are accused of pandering to special interest groups or naively seeking a panacea in a plebiscite. As critical theorists have documented over time, the foundations of the shareholder primacy model have always been compromised. In particular, the arguments for a core feature of the modern corporation—the exclusive shareholder franchise—have been revealed as the product of flawed assumptions, misapplied social choice theory, and a failure to hold true to the fundamental precepts of standard economics. It is time to look at such governance features anew, and reorient the literature around the basic purpose of corporations: to provide a legal mechanism for business firms to engage in the process of joint production. In this Article, we present a new shared governance model, one that builds on the longstanding theory of the firm as well as a novel theory of democratic participation. These twin arguments, economic and political, both counsel in favor of extending the corporate franchise to employees as well as shareholders, and, importantly, provide a way to distinguish these two constituencies from other corporate stake-holders when it comes to governance rights. We conclude by assessing the current status of a shared governance system in Germany and advocating for further theoretical and empirical inquiry into shared governance structures that provide for joint shareholder and employee participation