August 22, 2005
Conglomerate Junior Scholars Workshop: Matt Bodie on the False God of Shareholder Primacy
Posted by Christine Hurt

Welcome to the first installment of Conglomerate Junior Scholars Workshop.  Our featured paper today is AOL Time Warner and the False God of Shareholder Primacy by Matthew Bodie.  Matt is an assistant professor at Hofstra University School of Law teaching both business courses and employment law.  He has published several articles including an article at the intersection of business law and employment law:  Aligning Incentives with Equity: Employee Stock Options and Rule 10b-5, 88 Iowa L. Rev. 539 (2003).

Matt has brought his paper to the right place, as resident shareholder primacy expert Gordon Smith will undoubtedly be able to offer helpful comments.  Gordon has written on this topic before:  see D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277 (1998); Robert B. Thompson & D. Gordon Smith,  Toward a New Theory of the Shareholder Role:  "Sacred Space" in Corporate Takeovers, 80 Tex. L. Rev. 261 (2001).

Conglomerate also asked Professor Doug Moll of the University of Houston Law Center to begin discussion of this paper.  Doug teaches in the areas of business organizations, securities regulation, and secured credit, and writes in the area of shareholder oppression and closely held corporations.  Doug's comments on the paper:

In AOL Time Warner and the False God of Shareholder Primacy, Professor Matthew Bodie uses the "almost universally regarded as a disaster" merger of AOL and Time Warner to explore the norm of shareholder primacy in a practical, real-world context. Professor Bodie characterizes AOL as a company that believed in the notion of shareholder primacy -- a company whose efforts "focused . . . almost entirely on the stock price." Time Warner, on the other hand, is characterized by Professor Bodie as a company with "a culture which placed the institution above the shareholder, and journalistic ethics above any requirement to make short-term profits." By tracing the relative decline of AOL and the relative success and continuity of Time Warner (at least in terms of influence), Professor Bodie challenges us to think about what shareholder primacy means in operation and to consider the "potential perils of shareholder zealotry." As I read Professor Bodie's provocative piece, I had some discomfort with the association of AOL and shareholder primacy. Professor Bodie describes AOL's focus on short-term performance and its obsession with meeting Wall Street's quarterly and annual numbers -- at almost any cost. As one example, seeking long-term relationships with advertisers was essentially seen as pointless. The goal was simply to get whatever could be gotten -- at that moment in time -- regardless of whether the relationship suffered. And, as Professor Bodie points out, this short-term focus did a fabulous job of maximizing shareholder wealth -- at least for the shareholders who sold out in time. I wonder, however, about the relationship between shareholder primacy and short-term value. To the extent that maximizing short-term value harms long-term prospects, a company that focuses on short-term value is presumably operating inconsistently with the core of the shareholder primacy norm. Indeed, AOL seemed to focus on stock price as the product rather than as the result of a product. Professor Bodie acknowledges this point -- he suggests that primacists would object to illegal actions that boost stock price in the short term because "it will generally be a losing strategy in the long term." But then what does AOL teach us? Does it convey that shareholder primacy is, indeed, a "false god?" Or does it simply suggest that shareholder primacy has a temporal element -- it's about the marathon, not the race?

Readers, feel free to comment in the "Comments" section to this post. No anonymous posts, please.

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