Economic Argument for Stakeholder Corporations
July 8, 2019
By Lenore Palladino
The mainstream economic theory that guides corporations in the US only works if markets are perfectly efficient. This flawed theory has led to corporate decision-making that centers shareholders above all else, including other stakeholders (e.g., workers), long-term business growth, and economic health. This shareholder-first ideology is referred to as “shareholder primacy,” which does not reflect how corporations actually operate and distribute value between stakeholders.
While many economists argue that the shareholder primacy model is, and always has been, a “natural law” of the market, its dominance in American corporate governance is only decades old. Ultimately, shareholder primacy is a failed economic model. By documenting the economic arguments made to support shareholder primacy and showing why these assumptions do not hold, this white paper adds to the growing literature on the effects of corporate shareholder primacy. Here, Lenore Palladino argues that shareholder primacy should be replaced by a model of “stakeholder corporations,” in which stakeholders collectively engage in corporate governance and own corporate equity.
