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Speaker's Corner: Time to end shareholder primacy

As lawyers, we are all acutely aware of the fact that changes to the law are a given. Society changes, technology changes and governments change. Meanwhile, the law needs to keep up.


Therefore, as a profession, we must keep up as well.

But the greatest challenge may lie where we need to change a paradigm about how the law is interpreted. It is not a problem with a specific rule or regulation. That you can fix with wordsmithing.

Instead, the problem is a general point of view widely held by practitioners and regulators that won’t go away.

Take the notion of shareholder primacy in corporate law.   

Shareholder primacy is the paradigm that all corporations exist solely to maximize shareholder wealth. For those who hold that paradigm, it is considered absurdly obvious that all corporate legal rules need to be interpreted with that idea in mind.

Take the law governing the fiduciary duty of directors.

All business corporation statutes in Canada include language requiring that a corporate director act honestly, in good faith and with a view to the corporation’s best interests (for example, see s. 134 of Ontario’s Business Corporations Act).  

The shareholder primacy paradigm holds that the corporation’s best interest equals the shareholder’s best interest, and the shareholder’s best interest is in maximizing its wealth.

This means that, in a shareholder primacy world, if a director does not maximize the shareholder’s wealth, they can be held personally liable.  

The problem is that we do not live in the shareholder primacy world. But acting as if we do has terrible consequences.

To those locked in the shareholder primacy paradigm, corporations do not have to worry about the social and environmental impact of their decisions. Shareholder returns are all that matter.   

However, shareholder primacy is only an interpretive approach. There is nothing explicit in corporate law itself that requires lawyers and policymakers to use it as the background principle for corporate law.

As Cornell University professor Lynn Stout argued in The Shareholder Value Myth, “The notion that corporate law requires directors, executives and employees to maximize shareholder wealth simply isn’t true.”

That means that if we want to, we can abandon shareholder primacy for another paradigm better suited to today’s challenges.  

And, there is another paradigm that can counter shareholder primacy. It holds that a board’s role in running the company is about balancing the interests of various stakeholders.

This means making decisions with a view to maximizing long-term corporate profitability. The board does this by factoring into corporate decision-making the interests of the community, employees, suppliers and government, as well as the environment, along with those of the shareholders.  

In academia, this is known as a managerialist view and it is not new.

The debate between shareholder primacy and managerialism can be traced back to as early as 1932, during the Great Depression in the United States. Columbia Law professor Adolf Berle was an early proponent of shareholder primacy.

Harvard Law Professor Edwin Merrick Dodd hotly contested Berle’s views. Ironically, Dodd won. By 1954, Berle had conceded. Yet, shareholder primacy survived and eventually came to dominate.

The managerialist view contains the seeds of what we know today as corporate social responsibility.

This is the idea that corporations exist simultaneously in a financial, social and environmental context. In this model, profits are still very important. But profits need to be balanced with the planet and with people.

The fundamental problem with the shareholder primacy approach is that it behaves as if the only stakeholders in a corporation are shareholders and managers. To address the issues facing business today — diversity, climate change, living wages, international business and human rights — there is nowhere to begin.  

We need to abandon shareholder primacy thinking in favour of an approach that embraces CSR. And luckily for us, the Supreme Court of Canada has given us a little help. In BCE Inc. v. 1976 Debentureholders ([2008] 3 S.C.R. 560), the SCC rejected the idea that directors are trapped in a shareholder primacy world.

The ruling explicitly states that as part of the business judgement rule, directors can look to the interests of “. . . inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.” That is a start.

In corporate law, the shareholder primacy paradigm needs to go. Instead, we need to synchronize corporate legal thinking with corporate social responsibility. The Supreme Court has given us a tiny nudge down that path.

By banishing shareholder primacy from corporate law, we can intensify the work the world desperately needs to make corporations environmentally, socially and financially sustainable.


Warren Ragoonanan is an international business lawyer with Gardiner Miller Arnold LLP. He can be reached at warren.ragoonanan@gmalaw.ca.

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