How Shareholder Primacy Took Over Corporate America

Ask almost anyone what a company is for, and you’ll get the same answer: to make money for the people who own it. It feels like gravity. Something that was always true and always will be.

It wasn’t, and it may not be.

The idea has a name: shareholder primacy. It has a history that is shorter and stranger than most people realize. It won a court case in 1919, lost the argument for the next fifty years, and only became the rulebook in the 1970s and 1980s, built out of a magazine essay, a finance paper, and a decade of corporate raiders. This is the story of how one idea about business went from contested to obvious, and why it is being contested again.

1919

Shareholders win in court

Profit for the owners

→

1954

Stewardship prevails

Balance everyone's interests

→

1970s–1980s

Shareholders first

Maximize shareholder value

→

2008–today

The debate reopens

Who should companies serve?

The purpose of a company has never been settled for long.

When corporations had to ask permission (1800s to 1919)

Two hundred years ago, you could not simply start a corporation. You had to ask your state legislature for one, and it usually said yes only if you were building something the public needed: a turnpike, a canal, a bridge, a bank. The early corporation was less a money machine than a public works contractor with investors.

That changed over the 1800s as states passed general incorporation laws, which let anyone form a company for any lawful purpose by filling out paperwork. New Jersey and then Delaware competed to offer the friendliest rules, and Delaware won. That is why so many companies you have never associated with Delaware are legally headquartered there.

Then Henry Ford picked a fight with his own investors. By 1916, Ford Motor Company was sitting on a mountain of cash, and Ford announced he would rather spend it cutting the price of the Model T, raising wages, and hiring more workers than pay it out as dividends. Two of his minority shareholders, the brothers John and Horace Dodge, sued. They wanted their share of the pile, partly to fund the car company that still carries their name.

In Dodge v. Ford Motor Co. (1919), the Michigan Supreme Court ordered Ford to pay the dividend and wrote the sentence that would define the next century: “A business corporation is organized and carried on primarily for the profit of the stockholders.”

There is a wrinkle that usually gets left out. The same court refused to stop Ford’s factory expansion, saying judges should not second-guess business decisions. So the most quoted line in corporate law came from a family squabble inside a privately held company, in a case the shareholders only half won. It did not matter. The sentence took on a life of its own.

The fifty years everyone forgets (1930s to 1970s)

If Dodge v. Ford had settled the matter, there would be no story. Instead, within a dozen years, two law professors were arguing the question all over again in the pages of the Harvard Law Review.

Adolf Berle took the Ford side. Managers, he argued in 1931, hold their power on behalf of shareholders and nothing else, and the law should keep them on a short leash. The next year, E. Merrick Dodd replied that a corporation is a citizen with obligations to its workers, its customers, and the public, and that managers should act as trustees for all of them.

Berle had a bigger point to make, too. In The Modern Corporation and Private Property (1932), he and economist Gardiner Means showed that the largest American companies were owned by so many scattered shareholders that none of them had any real say. The people running the company were the people in charge of it. That fact, more than any theory, shaped what came next.

Dodd won. By 1954, Berle himself admitted that his rival’s view had carried the day. After World War II, the executives of companies like General Motors and AT&T saw themselves as stewards balancing the interests of employees, customers, suppliers, and the towns they operated in. Shareholders got a reliable dividend and a seat at the table, not the head of it. As late as 1981, the Business Roundtable, the lobbying group for America’s biggest CEOs, described shareholder returns as one of several interests a company must serve.

The counterrevolution (1970 to 2001)

By the late 1960s, the managerial model had a problem: a lot of those well-meaning stewards were running their companies badly. Conglomerates sprawled, profits sagged, and nobody seemed accountable. Into that opening stepped three forces that, together, flipped the script in a single generation.

An economist’s op-ed. On September 13, 1970, The New York Times Magazine ran an essay by Milton Friedman with a blunt thesis: the one social responsibility of business is to increase its profits, as long as it plays by the rules. An executive who donates company money to a cause, Friedman wrote, is being generous with other people’s money. It belongs to the shareholders. The essay was short, quotable, and furious, and it gave a generation of executives permission to stop apologizing for making money.

A finance paper. Six years later, Michael Jensen and William Meckling turned Friedman’s argument into math. Their 1976 paper reframed the corporation as a bundle of contracts, with shareholders as the owners and managers as hired hands whose interests naturally drift away from the people paying them. The fix, which took hold over the following two decades, was to pay executives mostly in stock, so that the manager’s bank account and the shareholder’s rose and fell together. If you have ever wondered why CEO pay exploded in the 1990s, this paper is where it starts.

The raiders. In the 1980s, new financing tools let investors borrow enormous sums to buy companies whose stock was trading below the value of their parts, then break them up and sell the pieces. Suddenly a low share price was not just embarrassing but dangerous. Boards learned to manage the stock price first and everything else second. Delaware’s courts, which referee most big American companies, drew the lines. In a 1986 case involving the cosmetics company Revlon, the Delaware Supreme Court ruled that once a company is being sold, its board has one job: get shareholders the best price available. Everything else, including loyalty to employees and communities, drops away.

By 1997, the Business Roundtable had quietly rewritten its 1981 statement. The paramount duty of management and the board, it now said, is to the stockholders. Four years later, two law professors published an article titled “The End of History for Corporate Law,” arguing the shareholder model had won not just in America but everywhere. For a while, it looked like they were right.

Second thoughts (2008 to today)

Then 2008 happened. Banks that had chased short-term stock gains nearly took the world economy down with them, and the question of what companies are for came roaring back. Scholars pointed out something that had gotten lost: the law never actually required shareholder primacy. Outside the narrow situation of a company being sold, courts give directors wide latitude to invest in workers, customers, and the long term. Lynn Stout’s 2012 book The Shareholder Value Myth made the case to a general audience, and the title stuck.

A new kind of company. The limits were real, though. In 2010, Delaware’s court struck down craigslist’s attempt to lock in its community-first culture, ruling that a for-profit corporation cannot put its mission ahead of its shareholders’ returns. The same year, Maryland created an answer: the benefit corporation, a company that writes a public purpose into its founding documents so that directors can weigh that purpose against profit without being sued for it. Some version of the law now exists in well over 30 states and the District of Columbia. Patagonia is one.

One source of confusion worth clearing up: a benefit corporation is a legal status granted by a state. A Certified B Corp is a seal of approval sold by a nonprofit called B Lab. A company can have one, both, or neither.

The CEOs change their minds. Or say they do. In August 2019, the Business Roundtable made headlines with a new Statement on the Purpose of a Corporation. Signed by 181 chief executives, including the heads of Apple, Amazon, and JPMorgan Chase, it pledged companies to customers, employees, suppliers, and communities, with shareholders listed last. It reversed the group’s own 1997 position, and newspapers called it the end of shareholder primacy.

So, did anything change? Two Harvard law professors, Lucian Bebchuk and Roberto Tallarita, decided to check. They asked the signing companies a simple question: who approved this? Of the companies that answered, nearly all said the CEO signed on without going to the board, which is not how companies handle decisions they consider important. Two years on, the signers’ own governance rules still put shareholders first, and the professors concluded the statement was mostly for show. Martin Lipton, the lawyer who invented the “poison pill” takeover defense and a longtime champion of the stakeholder view, shot back that they were looking in the wrong place. Formal bylaws, he argued, were never where a company’s real commitments show up.

Both sides have a point. And that is the point: a century after Dodge v. Ford, the argument is still live.

Why it matters to you

You do not have to sit on a board to feel the effects of this history. It shapes whether your employer invests in training or in buybacks, whether a product you like gets better or gets cheaper to make, and whether the company you have spent a decade building can survive being sold. A few things worth knowing:

The law is looser than the culture. Companies have more room to serve workers and customers than most executives believe. The constraint is usually habit, not statute.

Follow the incentives. Stock-based pay and the threat of a takeover push companies toward quarterly thinking far more than any court ruling does.

Promises are cheap; charters are not. If a company wants its mission to outlast its founder, the benefit corporation exists for exactly that. A press release does not.

Watch what changes, not what gets said. The 2019 pledge from 181 CEOs changed almost nothing because it changed almost nothing on paper. The next pledge will be the same unless it comes with new rules.

The pendulum has swung twice in a hundred years. Anyone who tells you the question of what a company is for has been settled is describing the last swing, not the next one.