Weeding Out Flawed Versions of Shareholder Primacy
| Mar 11, 2022 | Gabelli School of Business
One of the foundational questions in business is: “Who should companies serve?” Should they serve shareholders and put profits first, or should they also serve employees, customers, suppliers, and the community before making decisions—even if the bottom line takes a hit?
Shareholder primacy is an organizational approach that posits that managers have a duty to serve the interests of shareholders. Its profits-first focus has long been viewed to be at odds with stakeholder theory—an approach that also factors in the interests of employees, customers, suppliers, and the community. In both cases, managers have certain minimal obligations, like abiding by the law and fulfilling contracts. However, some business theorists believe that only stakeholder theory incorporates other obligations that may not contribute to long-term shareholder value, such as providing help to an employee going through a rough patch or preventing certain types of profit-maximizing pollution.
“Serving the interest of shareholders requires pursuing socially responsible activities that promote long-term shareholder value,” said Santiago Mejia, PhD, assistant professor of law and ethics at the Gabelli School. “But it also involves a host of additional moral responsibilities and obligations that ought to be fulfilled, even if the bottom line takes a hit.”
In his paper, “Weeding Out Flawed Versions of Shareholder Primacy: A Reflection on the Moral Obligations That Carry Over from Principals to Agents,” which earned an Outstanding Article Award from Business Ethics Quarterly, and his 2021 follow-up paper on the same topic, Mejia argued that the profits-first focus of shareholder primacy doesn’t negate managers’ responsibility to do what’s right. Managers acting on behalf of shareholders are required to fulfill a variety of moral obligations, such as helping others in need and respecting human dignity.
Consider this scenario: suppose a hurricane displaced hundreds of people, and a manufacturing company can convert two of its warehouses into temporary housing, but this will result in a small hit to short-and long-term profits. Should the company do it? Most scholars would think that if the manager’s responsibility is to serve shareholders, they should not. Mejia disagrees. Even if it ends up hurting the bottom line, the company has the resources to provide significant relief without incurring too many risks and costs. Thus, even if shareholders have their eye on profits, they ought to recognize that in a life-threatening situation like this, their company should do the right thing and provide help. Managers acting on their behalf should follow suit.
Mejia said he pursued this research in part because shareholder primacy has long been misunderstood and poorly implemented. “When you recognize that most of the obligations of shareholders are inherited by the manager,” he said, “you can see that shareholder primacy and stakeholder theory, while not identical, are much closer than it may at first seem.”