In response to: The Future of Shareholder Wealth Maximization
Professor Marcoux’s thoughtful reply to my essay serves as an important reminder that a corporation may accurately be described as a nexus of contracts. Notwithstanding its significant descriptive power, it is a framework that tends to be criticized along with agency theory and the Shareholder Wealth Maximization norm with which it is closely associated. Marcoux applies the framework to suggest that corporations have no purpose, except perhaps to fulfill the contracts made between its stakeholders—i.e., the parties to the contracts meeting at the firm. Although, as an ontological matter, a corporation may be classified as a contract-facilitation entity, I do not believe that this classification necessarily precludes the existence of a purpose.
When the participants in an undertaking create a firm, they presumably do it to be better able to advance some end than they would without the corporate form. (For example, recall that a corporation allows its principals to tie up their capital to alleviate the defection problem. It also provides the principals with limited liability and other benefits like easier diversification.) The end may be profit for the principals, profit to be donated to charity (e.g., Newman’s Own Inc.), or to provide health care to an area (e.g., nonprofit hospitals). That the collective undertaking is pursued via the corporate form need not strip it of its end, though it may do so if corporate formation necessarily causes shareholder wealth maximization to displace a different prior goal.
As Marcoux suggests, one of the corporation’s chief benefits is that it alleviates the cost of incompleteness in a long-term relationship. Over the course of such a relationship, issues arise that the participants did not anticipate. If it were possible to create a contract that specified every contingency at the outset (it is not), it would be costly beyond belief. The corporation facilitates the resolution of unforeseen issues by investing managers with command authority to address unanticipated circumstances without bargaining. As my able colleague reminds us, however, managers may act in ways inconsistent with the advancement of the ends for which the corporate relationship was created. Corporate law attempts to remedy this problem by imposing fiduciary duties upon managers.
In other words, while it is most certainly the case that stakeholders ought to get out of the firm what they were promised, it is no less the case that the exchange with the firm’s principals requires that the stakeholders put in what they promised. In the case of managers, I offer that the good-faith pursuit of the owners’ ends is properly viewed as one of their promised inputs. This contract between managers and owners is thus different from Marcoux’s supply contract. Although the supplier need only provide the contracted-for goods or services without concern for shareholder goals, the managers have a duty to contract with the supplier only if doing so facilitates the promotion of its principals’—i.e., the corporation’s—purposes.
Shareholders, managers, suppliers, and others indeed have different individual purposes for contracting with one another. On their own, these contracts would be a purposeless set of individual agreements in a vast marketplace, perhaps “connected only by common observance of certain rules of conduct” and enforced via the power of the state. The corporation, as it aggregates these contracts, aligns them toward a purpose. Managerial responsibility to pursue these ends becomes part of some contracts (i.e., that of the managers), and dictates whether others (e.g., contracts with suppliers) exist in the first instance. The law attempts to keep corporate alignment true while ensuring that stakeholders receive the benefits of their bargains.
 See generally, e.g., The Firm as an Entity: Implications for Economics, Accounting and the Law (Yuri Biondi et al. eds., 2007) and the articles in Acct. Econ. & L., June 2012 and Acct. Econ. & L., June 2013.
 I say “presumably” here, and “necessarily” in the previous sentence, because one can, at least abstractly, imagine a firm that exists in a sort of nihilistic state for no particular reason, whose stakeholders’ voluntary, directionless actions cause it to behave randomly, or not at all.
 Using Oakeshott’s taxonomy as presented by Professor Marcoux and as I understand it, perhaps it can be said that the contract between principals and managers turns the corporation into an enterprise association, or at least requires the managers to behave as if it were an enterprise association. I am not, however, a scholar of either Oakeshott or twentieth-century political philosophy.
In “The Future of Shareholder Wealth Maximization,” George Mocsary undertakes two important tasks. The first is to establish that, notwithstanding claims to the contrary advanced by some corporate law scholars, the shareholder wealth maximization norm is and remains a bedrock principle of corporate law. The second is to establish that, on broadly libertarian grounds, the…
In “The Future of Shareholder Wealth Maximization,” Prof. George Mocsary examines two questions: Does corporate law require a corporation’s board of directors to act to maximize shareholder wealth in order to fulfill its fiduciary duties; and if yes (as Prof. Mocsary interprets the cases), should it continue to do so? In this Response, I argue…
Prof. Cynthia Williams raises some of the standard arguments against the shareholder wealth maximization norm. Most of her arguments are addressed in my original essay, and restating what is written there would not add to the conversation. On other points, which can be boiled down to problems with short-termism in its myriad manifestations, we obviously…