Vanderbilt Law Review

First Page



The doctrine of shareholder primacy has received substantial attention from its legions of proponents, its indefatigable opponents, and even its disinterested observers. The notion that a corporation should be run in the interests of its shareholders is the theoretical foundation upon which modern corporate law stands. Almost all empirical study in corporate law is premised on a notion of shareholder primacy, and these results would lose much of their meaning if the theory were somehow disproved. Perhaps most importantly, shareholders do in fact have primacy of place within the corporation, as they alone generally have the right to elect the firm's directors.

Despite the importance of shareholder primacy to the American (and increasingly global) corporation, there is one aspect of shareholder primacy theory that has not received sustained scholarly critique. In justifying the limitation of the franchise to shareholders, scholars have repeatedly turned to social choice theory-specifically, Arrow's theorem-to raise concerns about expanding the corporate electorate. Arrow's theorem posits that no social choice function, including any voting procedure, can simultaneously fulfill four conditions of democratic fairness and guarantee a transitive outcome. Citing the theorem, corporate law commentators have argued that combining different stakeholders together into the electorate would result in a lack of consensus and, ultimately, the lack of coherence that attends intransitive social choices. Plagued by these voting pathologies, a corporation with such an electorate could even be led to "self-destruct."

This argument from Arrow's theorem, however, overestimates the concerns raised by the theorem about the aggregation of more diverse preferences. Almost any time that different viewpoints are converted into social choices, disparate preferences must be reconciled. In fact, the only way around this would be to assume that shareholders will never disagree-increasingly a flawed premise. More importantly, the argument misreads the import of the theorem- namely, that any voting system will fail to achieve perfection, and thus we must confront the weaknesses of the particular system at hand.11 Ultimately, the shareholder franchise may avoid violating one of the conditions of Arrow's theorem only by violating another condition. This tradeoff has never been explicitly acknowledged or defended. Indeed, the entire argument has not received the attention it deserves.