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Explore who truly owns a company—shareholders, founders, employees, or society—and how ownership shapes business decisions and accountability.
The most consequential idea in the history of corporate governance was also one of the simplest: that the purpose of a corporation is to maximise returns to its shareholders, and that every other claim on the corporation — by employees, communities, suppliers, customers, and the natural environment — is legitimate only insofar as honouring it serves the ultimate goal of shareholder return. This doctrine, associated above all with the economist Milton Friedman‘s 1970 essay in the New York Times Magazine, did not merely describe how corporations behaved.
It prescribed how they should behave — and, over the following three decades, as it was absorbed into business school curricula, executive compensation structures, legal interpretations, and the culture of financial markets, it increasingly described how they did.
The intellectual foundations of shareholder primacy rest on a specific theory of the firm — the nexus-of-contracts view, developed by Michael Jensen and William Meckling in their 1976 paper on agency theory. The firm, on this account, is not an entity with purposes of its own but a web of contractual relationships among suppliers of inputs: labour, capital, raw materials, and management.
Among these input suppliers, shareholders occupy a special position: they are the residual claimants, entitled to what remains after all other contractual obligations are met. Because their claim is residual rather than fixed, shareholders bear the greatest risk and have the strongest incentive to maximise the total value of the firm. Giving them control over the firm’s management is therefore efficient — it aligns the incentives of those who control the firm with the incentives of those who bear its residual risk.
The argument is internally coherent. It is also, as its critics have argued with increasing precision, empirically false in its key premises and harmful in its consequences. The claim that shareholders bear the greatest risk is, in modern capital markets, largely fictitious: diversified shareholders can exit any particular investment in milliseconds, while employees, communities, and suppliers have firm-specific investments — in skills, relationships, and infrastructure — that cannot be costlessly redeployed if the firm fails or restructures.
The residual risk of a modern publicly traded firm is, in practice, distributed across a far wider set of stakeholders than the nexus-of-contracts model acknowledges, and the exclusive allocation of control to shareholders systematically underweights the interests of those who bear substantial but uncompensated risk.
The economist R. Edward Freeman developed the most influential alternative framework — stakeholder theory — which argues that the purpose of the firm is to create value for all those who have a stake in its activities: shareholders, employees, customers, suppliers, communities, and the natural environment. Freeman’s argument is not merely normative.
It is grounded in the claim that firms which attend to the interests of all stakeholders actually perform better over time than firms which single-mindedly pursue shareholder return — because they build the trust, loyalty, and collaborative relationships that are the foundations of sustainable competitive advantage.
The empirical evidence for this claim has strengthened considerably over the three decades since Freeman’s original formulation, as the consequences of shareholder primacy have become more visible: the financialisation of corporate strategy, the systematic underinvestment in long-term productive capacity, the erosion of employee wages and conditions, and the externalisation of environmental and social costs.
The legal scholar Lynn Stout argued that shareholder primacy was not merely bad economics but bad law. The claim that corporations are legally obligated to maximise shareholder value has no firm basis in corporate law — it is a business norm enforced through executive compensation structures and the culture of financial markets rather than a legal requirement.
Corporate directors have, in most jurisdictions, wide discretion to consider the interests of stakeholders other than shareholders, and the business judgement rule protects this discretion from shareholder challenge in most circumstances. The legal case for shareholder primacy, Stout argued, rests on a selective reading of a small number of cases — primarily the 1919 Dodge v. Ford Motor Company decision — and on the gradual colonisation of legal interpretation by economic doctrines that were always contestable.
The management theorist Colin Mayer has pressed the argument further by challenging the account of corporate purpose at its root. Mayer argues that the corporation’s unique social function — the function that justifies its legal privileges of limited liability and perpetual existence — is its capacity to make commitments over time horizons that individuals and markets cannot sustain.
The corporation exists to do what markets cannot do: to invest in relationships, capabilities, and long-term productive projects that require sustained commitment beyond the tolerance of quarterly earnings cycles. A corporation governed exclusively by the demands of liquid financial markets has been stripped of precisely the capacity that justifies its existence — its ability to hold assets and commitments through time, insulated from the short-termism that characterises individual investors and financial markets.
The Business Roundtable’s 2019 Statement on the Purpose of a Corporation — in which the chief executives of 181 major American companies formally repudiated the shareholder primacy doctrine and committed to serving all stakeholders — was widely interpreted as a turning point. It was also widely interpreted as a public relations exercise with limited operational content, given that the same executives continued to be paid primarily through equity-linked compensation structures that incentivise short-term share price performance.
The gap between stated corporate purpose and actual corporate behaviour is itself a finding of theoretical interest: it suggests that the norms governing corporate behaviour are embedded not in formal mission statements but in the incentive structures, accounting conventions, and cultural assumptions of financial markets — and that changing them requires institutional reform rather than rhetorical repositioning.
The question of what corporations are for is ultimately a question about the distribution of power in a market economy: about who gets to define the purposes of the most powerful private institutions in modern societies, and whose interests those purposes will serve. It is a question that cannot be answered by economics alone, because it is fundamentally a political question — about the kind of society we want to live in and the institutional arrangements through which that society is organised and governed.
