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Shareholder primacy is a theory of corporate governance, which believes that the interests of shareholders should be put in the first place compared with the interests of stakeholders. For example, shareholders make decisions directly on the company, hold regular board meetings and so on. The shareholder preference rule was originally used to solve the modern doctrine of minority shareholder oppression. But it turned into the oppression of minority shareholders. The principle of shareholder first has been criticized as inconsistent with the company's social responsibility and other legal obligations because it only focuses on maximizing the interests of shareholders
General electric (GE), which has struggled with its acquisition of Alstom power business, is a combination of businesses that need to be constantly shuffled as it pursues profits. As a result, GE's bosses seem to have prioritised chasing excitement in the capital markets over labouring to improve the underlying business, costing the company $23 billion.
GE was one of those companies that embodied the primacy of shareholders in the late 19th and early 20th centuries, when Thomas Edison's GE was at its most innovative when managers and owners were one. Control of the company rests with shareholders, who are deemed to bear the greatest risk and are therefore entitled to residual profits when other stakeholders -- customers, employees, creditors, tax authorities -- are satisfied.
However, as the shareholder base expanded, ownership became decentralized, leading to a separation of ownership and control. At the same time, performance-related pay measures such as earnings per share or total shareholder return have proved vulnerable to manipulation. The biggest defect of shareholder supremacy mode is that shareholders are no longer the bearers of residual risks. Institutional investors have large and diversified portfolios, and a company failure does not pose a significant threat to them. Employees are much more at risk, especially those whose skills are only relevant to their own company. Similarly, suppliers are often more at risk than shareholders.
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ReplyDeleteThe theory of shareholder supremacy believes that the shareholder is the owner of the enterprise. The property of the enterprise is formed by the physical capital invested by the shareholders. The shareholder assumes the residual risk of the enterprise, and of course should enjoy the residual control and residual claim of the enterprise. The basic idea of the theory of shareholder supremacy is that managers serve shareholders, shareholders are the bearers of the company's residual risks, shareholders have the right to use, dispose of, transfer their property rights, and the manager's goal is to maximize the interests of shareholders.
The theory of shareholder supremacy has certain limitations, including: (1) The source of value-added value of the enterprise is not only the material capital element originally invested by the shareholders; (2) Human capital is an important resource for the value-added of the enterprise, and the employees of the enterprise also bear the same burden as the shareholders. The risks associated with the business benefits of the enterprise; (3) The changes in the business environment have affected the interests of more and more individuals and groups, and the company has increasingly evolved into a “social enterprise”.
Do you think the interests of the shareholders are as important as the future of the company?
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