150 IV FORMULA LEGAL
Articulo 6 Modificación del artículo 40º del Decreto Supremo 009-2016 MIMP
Central to the corporate objective debate, are questions regarding the degree of consideration corporate managers should be required to give to the public interest, while managing the corporation. Or indeed if managers have a duty to consider the public interest at all.
Those in opposition to the above statement, would argue that the primary objective is the satisfaction of investor interests, which should take precedence over all other
competing interests41.
40 This view developed from a series of articles published, including; Eugene F. Fama ‘Efficient Capital Markets:
A Review of Theory and Empirical Work’, Journal of Finance [1970] Vol.25 (2): 383–417; M. Jensen and W. Meckling ‘Theory of the Firm: Managerial Behavior Agency Costs and Ownership Structure’, Journal of Financial Economics [1976] Vol.3 (4): 305–60; H. Demsetz ‘Toward a Theory of Property Rights’, American Economic Review [1967] Vol.57: 347–59.
41 Michael C. Jensen ‘Value Maximization, Stakeholder Theory and the Corporate Objective Function’ Journal of
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Berle and Means argued that the corporation ought to be managed to the benefit of shareholders, but ultimately disagreed with the general notion that this shareholder
entitlement was a proprietary benefit42. The idea of shareholders as proprietors
originated from 18th century entrepreneurial capitalism and from the pre-industrial
notion of businesses being an extension of its ownership43. The Berle-Means thesis,
acknowledged that unlike the traditional family-owned business, the dispersed owners of the corporation were at best providers of passive capital. That the passive
nature of their investments did not endow them with an especial status44. That said,
they believed that managing the firm on behalf of investors was the most effective way to curtail managerial power. Believing, that the separation of control from ownership had created a power vacuum, which if filled by managers unchecked, would
lead to absolutism45.
Perhaps most notable with regards to Berle’s thesis, is his acknowledgement of the corporation’s moral significance, and its responsibility to consider the public interest,
just like any other public institution would46. To this end, they stated; “It seems almost
essential if the corporate system is to survive, that the ‘control’ of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the
42 In Bligh v Brent [1897] AC 22, the court reset the ramifications of the concept of share ownership. Prior to
this case it was believed that share ownership entitled the holders to an equitable interest in the benefits of the company’s assets. But the court in delineating the company from an ordinary partnership stated that unlike the latter, were ownership was regarded as part ownership of the assets entitling the part owner to a share of the benefits or liabilities because of their right of ownership.
43 John Boatright, “Fiduciary Duties and the Shareholder-Management Relation: or what’s so special About
Shareholders? Business Ethics Quarterly, 1994 vol.4 Issue 4, pp. 393-407 at 394.
44 Adolf Berle, Jr. and Gardiner C. Means, The Modern Corporation (New York: Macmillan) at 355. 45 Adolf Berle, Jr., "For Whom Corporate Managers Are Trustees: A Note," 1372.
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income stream on the basis of public policy rather than private cupidity”47. Ultimately, the Berle-Means view of the corporation is collectivist in its perception of the firm as a socially responsible institution, even if shrouded in arguments for shareholder primacy.
In contrast, the neoliberalist contractarian view considers the corporation as a wholly private institution, a view which finds its roots in Coase’s theorem which considered
the corporation as a means of limiting transaction costs48. Continuing in this tradition,
contractarianism views the firm as a “nexus of contracts”, between a collection of
individual parties i.e. managers, employees, creditors and shareholders. With each of these parties having a direct contractual relationship with the other in contributing to
the execution of the firm’s productive operations49. Here, the firm provides the
parameters within which the contracting parties could interact, with each of the parties offering their respective inputs, in exchange for a corresponding output. To this end, corporate law exists to facilitate the governance arrangements that
underpin private contracts, by providing “off the shelf” templates which the
contractors can adhere to or alter to suit their needs50. The fluidity of contract
arrangements is pivotal to the contractarian view point, given its conviction that the heterogeneity of firm needs, demands that firms be allowed to contract on diverse terms that suit them. Founded on the belief that firms are better placed to determine their governance needs than outsiders not similarly privy to the information held by
47 Berle and Means (n43) at 313.
48 R .H Coase ‘The Theory of the Firm’ Economica 4, 386.
49 Marc T. Moore ‘Private ordering and Public Policy: The Paradoxical Foundations of Corporate
Contractarianism’. Oxford Journal of Legal Studies [2014] Vol.34, No 4, 693-728 at 699.
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insiders51. Contractarianism eschews mandatory rules for this reason and other
reasons, which could include its belief, that mandatory rules are made irrelevant by a lack of externalities resulting from these types of private contracts. This is due to the
fact that “market mediated individual choices would lead to socially optimal
contracts”52.
Of these contractual relationships, contractarians place greater value on that between managers and investors. In this relationship, managers promise effective corporate governance arrangements engineered to maximise shareholder value, in return for
the premium paid for a stake in the firm, in the form of shares53. Contractarianism
justifies the promotion of shareholder primacy within the firm governance matrix claiming their entrepreneurial risk-taking situates them as residual claimants. As such corporate law in recognising their importance, as well as the precarity of their position, grants certain rights to compensate, for their restricted claim to the firm’s
resources54. This irony-of the contractarian reliance on mandatory legal rules to
provide justification for one of its core tenets, was highlighted by Moore55. For this
reason, shareholder exclusivity is justified not only as the most effective strategy towards corporate goal attainment, but to ensure a return on the investment made by shareholders. The following section would examine some of the common arguments for shareholder primacy.
51 Michael Klausner ‘The Contractarian Theory of Corporate Law: A Generation Later’ Journal of Corporation
Law [Spring 2006] 781.
52 Ibid, 783. 53 Ibid.
54 Moore (n48) 701. 55 Ibid at 707.
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