Working Paper No. 07-23:
Against Shareholder Participation: A Treatment for McConvill's Psychonomicosis
Harry Hutchison, R. Sean Alley
Date Posted: 2007
It is possible that the director primacy model risks increased agency costs in exchange for more managerial freedom of initiative which leads to superior corporate performance while the shareholder primacy model, if viable, contributes to ex post and ex ante inefficiencies. As an empirical matter, share prices likely reflect the terms of corporate governance. Limited shareholder power regarding day-to-day management and takeover attempts is consistent with an accurate description of how corporations work as well as with the necessity of constraining accountability to preserve authority. Since we are contractarians, we prefer the director primacy model and embrace shareholder weakness. Whether we are right or not, it seems clear that there is a growing debate in corporate governance law about how power should be allocated among directors, shareholders and management. There has been a blizzard of scholarship which shares the goal of increasing the power of shareholders as a vehicle for improving corporate performance by constraining agency cost. By contrast, corporate law scholar, James McConvill, avoids the agency cost argument for increased shareholder control and instead, argues that shareholder empowerment should be seen as an end in itself. His recent article supplies a novel approach to corporate governance. While the satisfaction of selfish motives remains an undisturbed objective, material gain as a maximand is exchanged for a participatory experience. McConvill disputes prevailing conceptions of rational choice analysis and argues that the perceived logic which encapsulates rational choice theory fails to appreciate the non-financial benefits (shareholder happiness) that can be derived from increasing shareholder power. McConvill's fresh look requires an explanation and a critique. This article is the first of a series of articles that offer critical analysis to vitiate McConvill's Panglossian conclusions.