Outside the bankruptcy context, it is grossly misleading to suggest that shareholders are somehow entitled to—much less actually receive—everything left over after a company’s legal obligations have been met. To the contrary, shareholders cannot get any money out of a functioning public corporation unless two conditions are satisfied. First, under

The principal-agent model of the corporation is associated with a classic Journal of Finance article published in 1976 by business school dean William Meckling and finance economist Michael Jensen. Ambitiously titled “The Theory of the Firm,” the article described the economic problem that arises when the owner of a business or “firm” (the

“There should be no confusion … a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.”33 This remark, it is important to emphasize, was what lawyers call “mere dicta”—a tangential observation that the Michigan Supreme Court made in passing, that

Once we recognize the reality that different shareholders have different values and interests, it becomes apparent that one of the most important functions that boards of public companies of necessity must perform is to balance between and mediate among different shareholders’ competing and conflicting demands. Conventional shareholder value

Thomas Kuhn’s classic book The Structure of Scientific Revolutions,

In other words, it is only when a public corporation is about to stop being a public corporation that directors lose the protection of the business judgment rule and must embrace shareholder wealth as their only goal. Subsequent Delaware cases have made clear that, so long as a public corporation intends to stay public, its directors have no Revlon

First, U.S. corporate law does not, and never has, required directors of public corporations to maximize shareholder value. Second, closer inspection of the economic structure of public corporations reveals that shareholders are neither owners, nor principals, nor residual claimants. Third, the empirical evidence does not provide clear support for

The prescription for good corporate governance had three simple ingredients: (1) give boards of directors less power, (2) give shareholders more power, and (3) “incentivize” executives and directors by tying their pay to share price.

Consider two of the most popular types of empirical tests, cross-sectional analyses that compare the performance of corporations with shareholder friendly governance structures against more manager-oriented companies, and event studies that look at what happens when firms adopt particular shareholder primacy “reforms.”