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RIP Shareholder Primacy

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RIP Shareholder Primacy

Boston Review,

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Including employees as corporate owners might help reduce economic inequalities.

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8

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For decades, US corporations have adhered to the overarching rule of shareholder primacy – to maximize profits for their owners. In this astute analysis, economist Lenore Palladino challenges the validity of that narrow purpose, noting that shareholder primacy does not reflect the wealth created by employees and other stakeholders. She posits that new laws of governance can address the widening gap between rich and poor by distributing corporate gains more fairly among shareholders, management and workers.

Summary

Shareholder primacy is still the cornerstone of corporate governance in the United States.

The principle of shareholder primacy rests heavily on the work of economist Milton Friedman, who introduced it in his 1962 book, Capitalism and Freedom. His theory held that shareholders are the true owners of corporations and that businesses’ main objective should be to maximize shareholder value.

The doctrine of shareholder primacy relies on the argument that shareholders, who are not guaranteed dividends or capital gains, need an incentive to invest in a company. In essence, the theory says, employees benefit from employment contracts...

About the Author

Lenore Palladino is an assistant professor of economics at the University of Massachusetts.

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