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September 11, 2005

The Primacy of Primacy

Posted by Gordon Smith

I sat next to former guest blogger Brett McDonnell at the Iowa conference, and very early on he started making a list of "primacy" candidates. We are all familiar with "shareholder primacy" -- the notion that the interests of shareholders should come first in corporate decision making. In addition, Steve Bainbridge has been very effective at promoting his idea of "director primacy," even if that expression has muddied the terms of the debate.* This conference gave us several more candidates in the primacy race.

Frank Partnoy, for example, gave a provovative presentation on modern capital structure in light of the pervasive use of derivative securities and suggested that directors might focus on "capital structure primacy." Margaret Blair emphasized the need to service the corporation as a distinct entity, thus suggesting "entity primacy." Several papers touched on the peculiar corner of fiduciary law that kicks in when corporations are in the "zone of insolvency," suggesting the possibility of "creditor primacy." And Henry Hansmann offered a humorous account of the success of his article (with Reinier Kraakman) on "The End of History for Corporate Law," which prompted the term "citation primacy." (Perhaps Brett can chime in with others, as he was keeping a list.)

In the final paper presentation at the conference, Jill Fisch observed that over half of the presentations at the conference has touched on the primacy issue (in the traditional sense of ends, not means). Why are corporate law scholars are so preoccupied with this question? We know that directors have enormous discretion, as long as they are not self-dealing. Bob Clark, whose book (Corporate Law) we were honoring at the conference, observed that the primacy issue does not have much practical significance in the boardroom. Nevertheless, this question is important not because it is an end in itself, but because it is an important directional arrow in reform efforts. By defining the ends, you necessarily influence the choice of means.

* His assertion that "director primacy theory embraces the shareholder wealth maximization norm even as it rejects the theory of shareholder primacy" would be incoherent if "shareholder primacy" were only about the goals of corporate decision making. To reach his rhetorical destination, Steve redefines "shareholder primacy." Rather than contrasting "shareholder primacy" and "stakeholder governance" -- the notion that corporations should be operated for the benefit of all stakeholders -- Steve contrasts "shareholder primacy" with "managerial primacy" as possible answers to the question, "who controls the corporation?" When Steve talks about "director primacy," therefore, he is talking about control, not benefit. Means, not ends.

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Comments (7)

1. Posted by Brett McDonnell on September 11, 2005 @ 10:39 | Permalink

I have one more on my list from the conference. Chuck O'Kelley presented an interesting paper on the role of CEOs in public corporations, arguing that in many cases the modern CEO is filling the role of a traditional entrepreneur. This, inevitably, led to the phrase "entrpreneur primacy".

Let me add two more possibilities to this list. At the end of Gordon's post, while discussing Steve Bainbridge, we see the phrase "managerial primacy". That is quite possibly the most accurate description of large public corporations today. And as an advocate of the interests of workers in corporate governance, I wonder if I can be the first to coin the phrase "employee primacy". I doubt it--someone must have used it already.

2. Posted by Gordon Smith on September 11, 2005 @ 12:42 | Permalink

I started to write up Chuck's, but I balked. I wasn't sure about that one. I will happily credit you with "employee primacy."

I think we should all have our own primacy.

3. Posted by Brett McDonnell on September 11, 2005 @ 13:43 | Permalink

I have "entrepreneur primacy" in my notes. A very quick look at his paper doesn't turn up the phrase, but I think he used it in his talk. The fact that you sort of remembered it reassures me, although my own memory is not crystal clear.

A westlaw search of the "jlr" database shows no hits for "employee primacy". A search for "employee /3 primacy" gives 13 hits, but none of them really develops the concept in a way relevant here. So the phrase does appear to be mine for the taking (it doesn't count if it's not in jlr, after all). The sad thing is, I do have a working paper on employee governance, and I am now tempted to bring in the phrase. Can I resist the temptation? We'll see.

4. Posted by Vic Fleischer on September 12, 2005 @ 16:13 | Permalink

I'll nominate "consumer primacy."

I don't really think that this describes corporate law as it is or even as it should be, but I do think the role of consumers in this mix has been undertheorized.

5. Posted by Chuck O'Kelley on September 12, 2005 @ 19:40 | Permalink

Hi Brett and Gordon

I think one of the sections of the paper I presented this weekend includes the phrase "Entrepreneur Primacy." I also have a separate paper in progress by that name.

I thought Citation primacy was the best phrase of the conference.

Best

Chuck

6. Posted by Gordon Smith on September 12, 2005 @ 19:54 | Permalink

Thanks for the clarification, Chuck. It's an intriguing idea.

By the way, Brett alerted me to another new primacy, coined by Scott Moss over at Prawfsblawg: "Everybody Primacy!"

7. Posted by Gordon Smith on September 12, 2005 @ 19:56 | Permalink

Vic, The business folks would probably agree with you about consumer primacy. After all, if you don't have consumers, you are toast.