Jonathan R. Macey
“An economic analysis of the various rationales for
making shareholders the exclusive beneficiaries of
corporate fiduciary duties”
Critical review
25.10.2018 in Edinburgh, UK.
Exam No.B131660
WC: 997
1. Introduction:
In this article author expresses his support for a traditional state and corporate
law doctrine according to which the fiduciary duties are exclusively owed to
shareholders. His point of view is explained through three main arguments and
these are the residual claimant, the “too many masters” and the argument that
the shareholders are in the most need of fiduciary duties.
I don’t agree with the author’s point of view and advocate that fiduciary duties
should flow both to shareholders as well as nonshareholder constituencies,
especially employees.
2. Elaboration:
The idea behind the residual claimant argument is that shareholders should have
the ultimate right to guide the firm because they have the greatest stake in
decisions made and because they are, unlike fixed claimants who just want their
claims to be satisfied, interested in overall success of the firm and thus value it
mostly.
I would like to begin my argumentation by mentioning the shareholder theory of
the firm, which I am big fan of. According to this theory, the purpose of the firm is
to create value for both share- and stakeholders.1
Profit-maximizing is for sure a very important thing but not the only one. For me
there are also other purposes of the firm – such as to supply communities with
products they need to satisfy the intellectual needs of people - to enable them to
have jobs they are passionate about or good at.
A bit out of topic but though related to it – most statistics show that younger
people nowadays value things like working in a creative and inspiring field, in a
firm that grows and offers promotion and specialization opportunities more than
having a big salary. This clearly shows that other groups, employees especially,
1
R. Edward Freeman (1984) “Strategic Management: A Stakeholder Approach”
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care much more about the firm and its future development than certain
shareholders who have zero contact with day-to-day activities of a firm, tend not
to attend firm meetings, to have a big portfolio of many small investments and
thus avoid being bound to a single firm.
Easy transferability of shares clearly indicates my point of view. The
shareholders are able in any moment to sell their shares and will as soon as the
price is good without even thinking about the firm, whereby the employees tend
to establish longer careers within a single firm.
Another point here is that “a fixed claim” of employees is nowadays rarely
composed of a single salary. There are many bonuses which are dependent
upon firm’s success and annual well-performance. This shows that employees
also have a big stake in overall success of the firm.
The second argument of the author, the so-called “to many masters” argument,
expresses that it’s almost impossible to please the multitude of many competing
and conflicting interests. The author mentions that the interests of
nonshareholder constituencies, regarding managerial decisions, are either
indifferent or conflicting with the ones of shareholders.
Here I start with an example: If a company has to choose between two projects
of which one brings 1 Mio £ and other 3 Mio £ without risk, of course the second
project is in interests of everyone. Even for employees there is a slightest chance
that more money will be invested in the firm’s equipment, for instance. When
there is a risk on the other hand, the interests will be conflicting. But here the
author self mentions that there are firms with different types of shares, such as
voting and preferred shares and directors owe fiduciary duties to both.
Nevertheless, the firms were able make propriate decisions. Here I agree with
the author.
The last argument states that nonshareholder constituencies can protect
themselves against any managerial opportunism by simply contracting with the
firm. The author refers possible absence of contractual protection for
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nonshareholder constituencies to the fact that they are unwilling to pay for such
protection in the form of lower wages or lower interest rates on debt. The point
here is whether it’s technologically possible to protect themselves by drafting
strong contractual provisions in their favor.
The contract between the shareholder and a firm is for me no different from other
contracts. I don’t see why shareholders are not able to protect themselves also
through contracting?
They can set the terms of entry and exist in contracts, the right to withdraw the
investment when they object specific action or also sell their share anytime if they
are not satisfied with their investment.2
In of our previous classes we also talked about voting rights of shareholders.
Shareholders who wish to engage more in the guidance of a firm and thus have
more voice can either buy a bigger share or a voting share.3
Ultimately, the shareholders who do not feel confident with director’s guidance of
the firm can engage more in monitoring their actions. It’s just a matter if they are
willing to bear this additional agent monitoring costs.4
3. Conclusion:
My point of view is that nonshareholder constituencies care a lot about a firm and
its development. For this reason, they should also have their voice heard in
decisionmaking process.
Shareholders who experience agency problems can avoid them through simply
investing more money and setting specific terms in contracts.
2
J. Armour, H. Hansmann, R. Kraakman (2009) “Agency problems, legal strategies and enforcement”
3
R. C. Clark (1979) “Vote Buying and Corporate Law” 29 Case Western Reserve Law Review
4
M. C. Jensen and W. H. Meckling (1976) “Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure” 3 Journal of Financial Economics
3
The weak point is that taking care of many different interests can be quite
difficult. But nobody said that running a firm is an easy task. As firm grows, the
divergences between constituencies will become obvious but it is also more likely
that the interests of shareholders will become more heterogenous.
However, solving these issues is on the other hand, not an impossible task. It’s
just a matter about finding balance between the interests of corporate
constituencies.
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