Shareholder primacy theory is bad for business

Shareholder primacy theory baffles me. Shareholder primacy is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other corporate stakeholders. When you put the concerns of the shareholder over those of the employee or the customer, that just seems wrong to me. It seems to me if you take care of the employee, the employee will be happy and if the employee is happy that makes the customer happy and a happy customer is more apt to put their money in your register.

In the Army there was a saying, “Take care of the troop and the troop will take care of the mission.”

I understand that it is important to keep the shareholders at large companies like Disney or MGM happy so they will buy more $100+ shares yet if the workers are not happy customer satisfaction falls.

On the other side of shareholder primacy is a company like Zappos and SolarCity. Oh I am sure they are conscientious about what their shareholder’s concerns are yet I hear they are also take their employee’s job satisfaction to heart as well.

I believe shareholder primacy needs to be closely examined and rethought in any company that desires to be successful and relevant in years to come.

What are your thoughts on shareholder primacy theory?
Do you think this business model is good for the company and/or the customer?
Let me know in the comments. I would love to hear from you!

To learn more about shareholder primacy theory read The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public today.

26 Replies to “Shareholder primacy theory is bad for business”

  1. Shareholder primacy theory is a dominant principle in corporate law that leads the corporation decision-makers focus on the shareholders’ interests. Even though some scholars have questioned the validity of description and norm of the model, it is generally accepted that the objective of companies is to maximise shareholders’ benefits.
    As mentioned earlier, the original shareholder primacy theory can be found in Berle and Dodd’s debate in 1930s. In fact, the argument between them was mainly discussed two issues: how to characterise corporate law and how to develop it in future. Berle’s argument was based on the premise of that shareholders were owners of the company and directors were agents or trustees of these owners. Thus he believed that corporations should be run for shareholders’ interests. Dodd responded that as economic institutions corporations have a social services as well as a profit-making function, and directors should concern themselves with the interests of employees, customers, and general public, Shortly thereafter, Berle replied to this argument with the view that the managerial accountability could be reduced by increasing managerial discretion. Moreover, he believed that it was impossible to directors to be accountable to all constituencies. Although there were some fluctuations between shareholder primacy and stakeholder theories from the time of Berle-Dodd debate until 1970s, shareholder primacy has become thriftily since the late 1970s, and today in Anglo-American systems, it is the regnant theory in corporation law.

  2. I think the interests of shareholders are considered paramount by directors, over and above those of other stakeholders, such as employees or customers.

  3. “When you put the concerns of the shareholder over those of the employee or the customer, that just seems wrong to me. It seems to me if you take care of the employee, the employee will be happy and if the employee is happy that makes the customer happy and a happy customer is more ” Very true.

    I love this article. Thanks!

  4. Troy I totally agree with you on this one, having seen a great institution perform very poor simply because it take care of the students but ignores the welfare of the staff member. Thank you for putting across this content.

  5. An interesting piece of advise. I totally agree with you. First, make the employee happy, they will make the customers happy. This means that the business will move a notch higher and the shareholders will enjoy great returns.

  6. Great post- I was just talking to someone about this the other day! It’s really something to think about. There a two completely different perspectives. I can see both sides if that makes sense lol. I’m going to check out the book! Thanks for the post

    • Running a big business seems hard and complicated. The news that TESLA wants to buy and take over SOLAR CITY is very exciting and scary to me as I wait to see if it will actually happen and what will happen to my Solar City stocks (which are way down since I bought them.)
      Troy recently posted…Disneyland is Mickey MouseMy Profile

  7. Great and interesting post. I totally agree when employees are motivated they work whole heartedly then the company ends up benefiting.

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