Shareholder Primacy: Paradigm or Groupthink


Shareholder primacy is a norm of corporate governance that demands the allegiance of a corporation’s board of directors to the single objective of shareholder wealth maximization.  To think otherwise is considered a form of “corporate deviance”.

“Corporations are almost universally conceived as economic entities that strive to maximize value for shareholders”. 
— Yale Law Professor Jonathan Macey

To the Professor and just about everyone else, the popular battle for the corporate objective has been won - the objective of corporate governance is to assure financial corporations and other shareholders a profitable return on their equity investments.

On the margins of corporate law, economics and management science are the vocal minority who refuse to fall in behind Professor Macey, and the rest of what shareholder advocate James McRitchie calls the “corporate governance industrial complex”.  The deviants are the outsiders who rely on legal argument, logic and a failing thirty year case study to argue for greater choice in corporate governance.

Yet despite the minority arguably holding the higher intellectual ground, shareholder primacy is proclaimed to be entering its “golden age”.  Undeterred by the absence of evidence in support of their claims, the “in-group” openly mocks outsiders like Cornell Professor Lynn Stout from behind, what Professor Macey admits is an ideology and “possibly dogmatic belief in shareholder primacy”.

For free market thinkers, there is no freedom to choose the objectives of corporate governance.

Ideologues do not yield to reason. They ignore it and double down. Signalling that we may be moving with barely a whisper from a paradigm of knowledge into the realms of a psychological condition.

When a paradigm becomes “groupthink”, the better argument and all the warning signs can be ignored until it's too late.  And, even that’s not guaranteed.  Consider the global financial crisis.  Rather than take the opportunity to reconsider the norm of corporate governance, the crisis has become the trigger for the shareholder spring.

Why is it that the “in-group” is all over the dangers of groupthink in the boardroom but can’t recognize the signs of groupthink in their own thinking about the boardroom?

This essay considers whether the psychological phenomenon of groupthink explains why, in the face of growing disquiet and discontent with the belief in maximizing shareholder value, the corporate governance industrial complex, remains not only entrenched, but increasingly active in defending the status quo and maligning the alternatives.


 Groupthink is the “mode of thinking that persons engage in when consensus seeking becomes so dominant in a cohesive in-group that it tends to override realistic appraisal of alternative courses of action”.

First described by social psychologist Irving Janis in 1972, groupthink is characterized by a group that sets itself above the law and protects itself at all costs.  Instead of trying to find the best solution, the group uses a variety of techniques to encourage conformity.

The dangers of groupthink are well known.  The board and officers of Enron, WorldCom and more recently Citigroup in the lead up to the global financial crisis were all accused of groupthink.  Under the influence, these boards engaged in commercially unjustifiable risk taking.

Janis documented eight signs of groupthink:

  • Illusion of Invulnerability: Members ignore obvious danger, take extreme risk, and are overly optimistic.

  • Illusion of Morality: Members believe their decisions are morally correct, ignoring the ethical consequences of their decisions.

  • Collective Rationalization: Members discredit and explain away warning contrary to group thinking.

  • Out-group Stereotyping: Members construct negative stereotypes of rivals outside the group.

  • Pressure to Conform: Members pressure any in the group who express arguments against the group’s stereotypes, illusions, or commitments, viewing such opposition as disloyalty.

  • Self-Censorship: Members withhold their dissenting views and counter-arguments.

  • Illusion of Unanimity: Members perceive falsely that everyone agrees with them.

  • Appearance of Mindguards: Some members appoint themselves to the role of protecting the group from adverse information that might threaten the group.

According to Janis  “When more of these symptoms are present, the likelihood is greater that group think has occurred, and therefore the probability is higher that any resulting decisions will be unsuccessful, possibility even catastrophic”.

Unfortunately, in the absence of catastrophic failure, it can be difficult if not impossible to diagnose group think let alone convince those afflicted.  Just ask economist Nouriel Roubini who anticipated both the collapse of the US housing marketand the worldwide recession which started in 2008.

Groupthink and Shareholder Primacy

I believe that the characteristic symptoms of groupthink can be seen amongst the members of the corporate governance industrial complex.

But I freely admit that a handful of quotes and anecdotes is not an argument but a structured form of observation.  I’m also mindful that in a short essay it’s impossible to avoid the criticism that I’ve constructed a bogeyman of straw by selecting a few self- serving examples.

There are of course many open minded moderates within the corporate governance community but, if social media is any measure, there are many more close minded hardliners and fundamentalists who can't tell the difference between a paradigm of knowledge and a psychological condition.

Illusion of Invulnerability

The first sign of groupthink is that members are overly optimistic and ignore danger, leading to greater risk taking.  Under the illusion of invulnerability group leaders begin to believe they are infallible and always right.

Lucian Bebchuk, professor of law, economics and finance at Harvard Law School and director of its corporate governance program is the current day champion of the shareholder-centric corporate governance model.

Now consider this statement from the Professor’s article entitled, “The Long-Term Effects of Hedge Fund Activism”:

Empirical studies show that attacks on companies by activist hedge funds benefit, and do not have an adverse effect on, the targets over the five-year period following the attack.

Only anecdotal evidence and claimed real-world experience show that attacks on companies by activist hedge funds have an adverse effect on the targets and other companies that adjust management strategy to avoid attacks.

Empirical studies are better than anecdotal evidence and real-world experience.

Therefore, attacks by activist hedge funds should not be restrained but should be encouraged.

Bebchuk promotes hedge fund attacks despite the dangers of rent seeking behaviour being recognized as far back as Adam Smith.  Moreover, he ignores the warnings from those that work for and within corporations convinced that, within the tightly bounded rationality of his empirical analysis, he has captured the corporation like a child catches a bug.

And what if he was wrong ?  The consequences of his directive being misguided could be devastating.  But this possibility neither tempers Bebchuk’s encouragement for risk taking in the form of increasing activist attacks nor his unbounded conviction in his conclusion.

Belief in inherent morality

The second sign is the belief in a group’s inherent morality.  This belief causes members to believe they are the arbiters of what is morally right and just.

Shareholder value maximization is firmly entrenched in a duty based moral framework.  Shareholders are often described as the moral owners of the corporation and directors are said to owe a moral duty to shareholders.

The morality of shareholder primacy can be traced to its founding father, Milton Friedman.  In Capitalism and Freedom, Friedman makes the following remark:

“Consider a society based on private property rights. In such a society - Friedman claims - there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud ... . Few trends could so undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible”

Friedman argued that that the morally right thing for business to do is make as much money for shareholders as possible. 

Friedman’s moral argument

Friedman even warns that the very foundations of a free society are threatened by any other moral code of the corporation.

Tamara Belinfanti, explores the moral framing in her excellent paper, Forget Roger Rabbit—Is Corporate Purpose Being Framed? :

"...proponents of shareholder primacy describe shareholders as 'owners'. This notion of ownership taps into a deeply held value in American society of the benefits of acquiring property, having a homestead, and the general ability and freedom to exercise dominion over something that one owns (within the confines of law). Similarly, shareholder proponents use terms such as 'shareholder rights' and 'shareholder democracy'. The values of 'rights' and 'democracy' are near universal truths and are held as ideals that should not be tampered with. Other linguistic choices of shareholder primacy proponents include calls for increased 'transparency', 'governance', 'independence', and 'accountability', all of which tap into most people’s desire to live in a stable and law-abiding environment, where people bear responsibility for their actions, and where those in charge do not exercise imperialistic or clandestine power"

No other management idea creates the same sense of moral panic and outrage when questioned as the so called duty to maximize shareholder value.

Collective rationalization

The third symptom of groupthink is the group rationalization of warning signs that would otherwise cause members to question or abandon their assumptions.  Negative information reinforces the group’s commitment and is the cue to invest even more resources to rationalize that they are making the right decision.

If there was ever a warning sign that all was not right it was the rolling global financial crisis that began in 2008.

The response of the industry is telling.  Whilst a minority have used the crisis to reconsider the assumptions of shareholder primacy, the majority have responded by recommitting to the principles of shareholder ownership under the banner of the “shareholder spring”.

Rather than question whether the principles and practices of corporate governance contributed to the global financial crisis, the response to the crisis is to agitate for a purer form of corporate governance where activists shareholder, hiding behind the corporate veil, increasing demand the right to call the shots.

The push is on for greater shareholder influence and more "good" governance – more independent directors, more shareholder influence and more monitoring.  Despite the crisis, the lack of evidence in support of their claims and empirical studies that establish that corporations with “poor” corporate governance did better in the aftermath of the global financial crisis those with stellar records, nothing will dissuade the corporate governance industrial complex.

 Out-Group Stereo Types

The fourth symptom of groupthink is the groups stereotyping of adversaries.  A “with us or against us” attitude leaves no middle ground.  Adversaries are seen as unenlightened and weak minded and undeserving of a serious response. 

No two individuals capture the lopsided polarization of opinion between the shareholder first in-group and everyone else than Martin Lipton and Lynn Stout.

Lipton is a founding partner of New York law firm Wachtell, Lipton, Rosen and Katz, and has been credited with inventing the concept of the poison pill and is active in questioning the shareholder-centric governance of corporations.  To many he is the enemy of the “shareholder democracy”:

Speaking with the enemy: how the OSC's dialogue with Martin Lipton threatens those whom the OSC is charged with protecting

Fasken Martineau LLP

No one would accuse Lipton of being feeble minded.  Instead he is stereotyped by his profession.  A popular commentator is known to flippantly dismiss Lipton’s arguments on the basis that, as a lawyer he’s engaged by management and therefore you wouldn’t expect him to argue for anything else than management’s interest.

Cornell Professor Lynn Stout is also in the cross hairs following the publication of her academic best seller The Shareholder Value Myth.  And like Lipton, she is also stereo typed by her profession.

When Stout published an op- ed article, "Why Carl Icahn is Bad for Investors", activist investor Ichan and his loyal followers were quick to play the “academic" card:

In my opinion, the article was so wrongheaded that I am surprised that it was afforded an appearance in a premier business newspaper. I hope better academic guidance is provided for students in California than that exemplified in the editorial.

Carl Icahn the Icahn Report

Stout is presumably a tenured professor, thereby immune to the market forces that everyone in the private sector - from McDonalds workers to Icahn - not only lives with, but thrives upon.


Prof. Stout obviously has studied the results of many business deals over the years; but that she presumes to understand their underlying causes is pompous, even a bit silly.


Stout is an Academic. Not a practitioner. So, her opinion should be discounted at a much higher rate than that of someone who is actually in the business doing deals every day. Academics make me laugh.


These are not isolated examples but representative of the general attitude to Stout’s work as undeserving of serious consideration because she’s just an academic.  And, if you have any doubt about the "with us or against attitude" consider Mr Icahn's latest in-group only forum and the inflammatory imagery on the home page.

But I’ll leave the last word on the fourth sign of groupthink to Professor Stout:     

Yes, it’s pretty common to find that people who disagree with my ideas sometimes resort to vilification and ad hominem attacks. I personally always find this reassuring, as it suggests they have no good substantive critiques of my ideas, which in turn suggests I am probably getting it right.


Illusion of Unanimity

The fifth symptom of groupthink is that the majority view and judgments are assumed to be unanimous.  Group leaders reinforce this phenomenon by publicly and prematurely stating that the group has come to consensus.

If there is one sign of groupthink that is hard to miss it’s the illusion that everyone that matters agrees that shareholder wealth maximization is the objective of corporate governance and corporate law.

In Britain and the United States, maximizing shareholder value is universally accepted as management's paramount goal.

The McKinsey Quarterly, No. 2

“Corporations are almost universally conceived as economic entities that strive to maximize value for shareholders”

Jonathan Macey

“There is no longer any serious competition for the view that corporate law should principally strive to increase long-term shareholder value "

Hansmann and Kraakman

The “shareholder value” model has come to be accepted by most directors, shareholders, creditors, customers, academics, judges, legislators, and others over the last three decades as the optimal framework, or perhaps even the only cogent framework, underpinning corporate governance

The Conference Board


The pervasiveness of the belief has even led the god fathers of shareholder primacy to ominously conclude that resistance is useless:

It will not pay the individual citizen to invest much in understanding the issues surrounding the corporation controversy. If he is at all realistic he will understand that he is virtually powerless to do anything to effect the outcome.

Jensen and Meckling


The sixth symptom of group think is that members who disagree with the group will stay quiet and not express their disagreement.  Group members self-censor their dissenting behaviour to preserve their place in the group.

This one is for you to decide. 

Direct Pressure on Dissenters

The seventh sign of group-think is that members are under pressure not to express arguments against any of the group’s views.  Social pressure is applied to members who stand up and question the group’s judgement.

Consider what happened in 2014 when an SEC Commissioner and a Stanford law professor publicly questioning whether the Shareholder Rights Project at Harvard Harvard violated US Federal Securities Law by not disclosing the full body of evidence.

We are thirty-four senior professors from seventeen leading law schools whose teaching and research focus on corporate and securities law. We write to respectfully urge SEC Commissioner Daniel M. Gallagher, and his co-author Professor Joseph Grundfest, to withdraw the allegations, issued in a paper released last month (described on the Forum here), that Harvard and the Shareholder Rights Project (SRP), a clinic at its law school, violated the securities laws by assisting institutional investors in submitting shareholder proposals to declassify corporate boards.

The continuum of pressure on people who don’t conform to the shareholder first view of corporate governance extends to the comply or “else” regime.

Comply or explain is a regulatory approach used in a number of countries whereby listed companies must either comply with the requirements of the code, or if they do not comply, explain publicly why they do not.

To be clear, there is no empirical evidence to support the comply part of these codes including their obsession with independence.  For example Nell Minow, credited as one of the founders of the governance industry, has recently stated:

"No study has successfully drawn a credible connection between independence on the board and reduced risk or enhance returns. That is not because independence is unimportant. It is because our indicators of ‘independence’ are inadequate and flawed"

Despite this, public companies are expected to out themselves if they do not comply.  This is a form of direct pressure on dissenters who are required to public explain their action in “deviating” from an un-validated norm.  Companies must either conform to the norm or disclose their competitive advantage in not conforming to their competitors.  This entrenches the norm as there is no incentive to innovate.

Self-appointed ‘mindguards’

The last sign of group think is the emergence of self-appointed “mindguards”.  Individual members take it upon themselves to protect the group and the leader from information that is problematic or contradictory to the group’s cohesiveness, view, and/or decisions.

No one has "mindguard" on their profile.  However, thanks to the LinkedIn it’s possible to see the mindguards of shareholder primacy at work.

Here’s three examples of mindguards in action taken from my experience :


This post that compared the current state of corporate governance research with pre-Copernican astronomy was removed from a linked in governance group days after being published.

The post formed the basis of an essay that was later featured by 


When I questioned whether governing and directing are different, I was removed from the same LinkedIn governance group.  A link to my essay wasn't even posted to the group nor was I an active member following my earlier experience of censorship.    


After publishing "Governing and Directing:  Are they Different"  I was blocked for many months from posting to any linked in group without approval from the owner or moderator.  As result, many of my posts and comments continue to be pending approval weeks after submission. Linkedin advised that I'd be blocked by a moderator.

Clearly there are those out there who believe they need to protect their groups from different views.

Corporate Governance: Paradigm or Groupthink?

When I first started writing this piece in 2013 I accepted that I may have created a straw man.   But none of the symptoms went away.   Indeed, they're worse.  if rampant short termism and other non commercial behavior is any measure, the psychology that's driving shareholder primacy is reaching its peak.  An epoch that sadly we may only recognize in retrospect.




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