Shareholder Primacy and Deontology

• Date: 01 September 2015
• Author: Hasko Kriegstein
• DOI: http://doi.org/10.1111/basr.12063
• Published date: 01 September 2015

Shareholder Primacy

and Deontology

HASKO VON KRIEGSTEIN

ABSTRACT

This article argues that shareholder primacy cannot be

defended on the grounds that there is something special

about the position of shareholders that grounds a right to

preferential treatment on part of management. The

notions of property and contract, traditionally thought to

ground such a right, are now widely recognized as inca-

pable of playing that role. This leaves shareholder theo-

rists with two options. They can either abandon the

project of arguing for their view on broadly deontological

grounds and try to advance consequentialist arguments

instead or they can search for other morally relevant

properties that could ground shareholder rights. The

most sustained argument in the latter vein is Marcoux’s

attempt to show that the vulnerability of shareholders

mandates that managers are their fiduciaries. I show

that this argument leads to the unacceptable conclusion

that it would be unethical for corporations to make

incomplete contracts with nonshareholding stakeholders.

Hasko von Kriegstein is a Postdoctoral Researcher at the Centre for Moral and Political

Philosophy, The Hebrew University of Jerusalem, Mount Scopus, Jerusalem, Israel. E-mail:

hasko.vonkriegste@mail.huji.ac.il.

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Business and Society Review 120:3 465–490

© 2015 Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc.,

350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

INTRODUCTION

The shareholder primacy view (i.e., the idea that the man-

agement of business corporations ought to strive to maxi-

mize shareholder value) is not particularly popular with

many business ethicists. Indeed, it seems fair to say that the

shareholder view is the principal foe of mainstream business

ethics (cf. e.g., Green 1993, p. 1410; also Attas 2004; Ferrero et

al. 2014; Mitchell 1993). This status is underlined by the fact

that the most influential paradigm in business ethics in the last

three decades, the stakeholder paradigm, was developed (and

named) explicitly as a response to the shareholder primacy view

(cf. Freeman 1984). Milton Friedman’s (in)famous article in New

York Times Magazine from 1970 is included in most business

ethics textbooks and often read toward the beginning of busi-

ness ethics courses. But more often than not, Friedman’s con-

tention that, as the provocative title of the piece put it, “the

social responsibility of business is to increase its profits” is not

really given a hearing in that context (Friedman 1970). As far as

students of business ethics are taught in many introductory

courses, Friedman might as well have said that “the social

responsibility of business does not exist.” That is to say the

shareholder view is often treated not as a genuine theory of

business ethics, but rather as an expression of the (mistaken)

view that there is no need for business ethics.1This is a mis-

representation. The shareholder view places genuine constraints

on the behaviour of corporate managers by making them fidu-

ciaries of shareholders. And this means that managers are not

allowed to pursue their own self-interest. After all, maximizing

profits is not the same as maximizing management’s compen-

sation packages (Chan 2008).2And, considering the exponential

rise of C-level executive compensation over the last few decades,

it is not unreasonable to think that the moral demands made

by the shareholder view could underwrite many of the com-

plaints of the Occupy movement (Matsumura and Shin 2005).

That being said, however, the ethical constraints endorsed by

the shareholder view are rather minimal. While managers are

not allowed to enrich themselves, if they could increase profits

instead, there are no further ethical restrictions—as long as a

strategy is profit maximizing, it is moral.3Thus, the shareholder

466 BUSINESS AND SOCIETY REVIEW