Corporations are real, it's the shareholders who are the fictions

For a very different take on corporate law, watch this C-SPAN video of Cornell Law Prof. Lynn Stout talking to an audience at the Clinton School of Public Service at the University of Arkansas.

Stout2Among Prof. Stout's views:

  • As if countering progressive critiques of corporate personhood from discussions of the First Amendment, Stout maintains that corporations are very real; if any actor in the corporate context is fictional, it is the shareholder.
  • Shareholders are not "owners" in any meaningful way. Rather, shareholders have contractual interests in corporations, alongside others with contractual interests, such as bondholders and employees.
  • Stout denies that the interests of all corporate stakeholders are best served by maximizing the value of the holders of the "residual interests," i.e., the shareholders; Stout says that this proposition, argued by economists, is only true in the context of bankruptcy.
  • Shareholders and the public at large were both served better when corporate managers were regarded as hired hands, whose responsibilities were characterized in broader terms; the emphasis of maximizing shareholder value in the short term has perversely caused corporations to be less effective at increasing value for all concerned, including shareholders.
  • Government regulation of executive compensation has backfired. Stout seems to suggest that boards of directors would behave more responsibly, if they could not hide behind compensation formulas mandated by regulation.
  • To counter the value-destroying, short term behavior of public corporations, Stout suggests corporations treat long and short-term shareholders differently. For instance, both voting and dividend rights could be weighted to favor the shareholder who holds it, her or his position longer. In terms of public policy, the long-term capital gains holding period should be more like 3 to 5 years, rather than one year.
  • Corporate disclosure is a two-way street: Stout says corporate bylaws should require shareholders to reveal more about themselves and their shareholding agendas. No shareholder, whether individual or institutional, holds shares of public corporations in isolation; all shareholders have broader interests and aims.

At every turn, Stout attacks what she regards as received but erroneous wisdom, propagated by economists and obligingly regurgitated by lawyers who should know better or at least think more clearly, that corporate directors have legal duties to maximize profits for shareholders. Corporate law requires no such thing, she maintains.


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