Governance and Stakeholders

Governance and Stakeholders

Vikas Mehrotra, Randall Morck

Series number :

Serial Number: 
507/2016

Date posted :

June 07 2017

Last revised :

June 07 2017
SSRN Suggested citation Download this paper Open PDF Share

Keywords

  • Corporate governance • 
  • Stakeholders • 
  • quasi-rents • 
  • economic profit • 
  • efficient contracts • 
  • implicit contracts • 
  • contractual claimants • 
  • residual claimants

Economic models routinely assume firms maximize shareholder wealth; however common law legal systems only require that officers and directors pursue the interests of the corporation, leaving this ill-defined. Economic arguments for shareholder wealth maximization derived from shareholders’ status as residual claimants are vulnerable on several fronts.

Share valuations fluctuate as sentiment shifts.

Introductory finance casts firms as maximizing expected net present values, which are quasirents, expected earnings beyond expected costs of capital from investors, to which shareholders have no obvious claim. Other stakeholders – entrepreneurial founders or CEOs, employees, customers, suppliers, communities or governments, having made firm-specific investments, may exert stronger claims than atomistic public shareholders have to shares of their firms’ quasirents.

Consistent with this, their contractual claims are often augmented by residual claims and liabilities. Still, shareholder value maximization constitutes something of a bright line; whereas stakeholder welfare maximization is an ill-defined charge to assign boards that gives self-interested insiders broader scope for private benefits extraction. The common law concept of “the interests of the corporation” captures this ambiguity.

View full abstract

Authors

Real name:
Vikas Mehrotra