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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