Urska Velikonja


In the seminal paper that this symposium celebrates, A Team Production Theory of Corporate Law, Margaret Blair and Lynn Stout made two related points. First, that Delaware law does not require shareholder primacy in public corporations. Rather, the broad deference afforded to the decisions of predominantly independent corporate boards of directors is consistent with a contrary theory, that of team production, or, as they call it, “the mediating hierarch” theory. The fundamental role of the board of directors is to mediate between the interests of various stakeholders that contribute to the corporation’s output. As a result, Delaware courts have repeatedly authorized board decisions that further the interests of stakeholders at the expense of shareholders’ short-term interests, so long as directors are pursuing the long-term interests of the corporation. Second, Blair and Stout assert that such an arrangement is more efficient than narrow shareholder primacy. Board decisions are protected by the business judgment rule, which allows and enables the board, without risk of liability, to further the interests of stakeholders because that increases overall social welfare. Blair and Stout’s positive and normative assessments that team production is a better fit with Delaware corporate law, and likely more efficient, are convincing. In my brief contribution, I draw on a closely related area of law—securities regulation—to make two related points. First, unlike corporate law, securities regulation can be described as requiring shareholder primacy, or at least investor primacy. This is important because securities compliance takes up more of directors’ and officers’ time than compliance with corporate law, and thus likely influences and informs their day-to-day decisionmaking to a greater degree than does corporate law. If so, perhaps the persistent dominance of shareholder primacy in corporate governance should not be surprising. Second, investor primacy in securities regulation and enforcement may produce efficient results for most securities activities, but produces suboptimal compliance and enforcement for the most heavily litigated and debated category of securities misconduct: accounting fraud. Empirical evidence on the economic consequences of fraudulent financial reporting suggests that the exclusive focus on shareholders is misplaced.