Privatizing Vulnerability: The Downside to Shareholder-Value Maximization

In the aftermath of the global financial crisis (GFC) surfaced the continuing “Great Debate” over the purpose and contribution of the firm. This ongoing discussion has been present for the last two centuries and particularly over the last 80 years. The publicly held company (as we know it today) became firmly established in the earlier part of the 20th century and has been central to wealth creation in Western society. Two thinking leaders of the day, Adolph A. Berle and E. Merrick Dodd, debated in Harvard Business Law the question of what is the proper purpose of the firm. One question gripped the attention of Berle and Dodd: namely, does the publicly owned company only seek to maximize wealth on behalf of its shareholders, the so-called “shareholder primacy” view? Berle (1932, p. 1049) forwarded the thesis that “all powers granted to a corporation or the management of a corporation … are necessarily and at all times exercisable only for the profitable ben efit of all the shareholders”. Dodd (1932, p. 1144) disagreed, arguing that “the business corporation as an economic institution … has a social service as well as a profit-making function”. The “Chicago School” of economists championed by the Noble laureate Milton Friedman (1970, p. 33) threw its weight behind Berle and argued that because shareholders “own” the corporation, the only “social responsibility of business is to meet shareholder demands, namely to increase profit”.