It's Turtles (and Shareholders) all the Way Down

 Stephen Hawking starts A Brief History of Time with a metaphor wrapped in an anecdote: 

   ”A well-known scientist (some say it was Bertrand Russell) once gave a public lecture on astronomy. He described how the earth orbits around the sun and how the sun, in turn, orbits around the center of a vast collection of stars called our galaxy. At the end of the lecture, a little old lady at the back of the room got up and said: "What you have told us is rubbish. The world is really a flat plate supported on the back of a giant tortoise." The scientist gave a superior smile before replying, "What is the tortoise standing on?" "You're very clever, young man, very clever", said the old lady. "But it's turtles all the way down!”

A similar tale could be told in the context of Australian corporate law:

An old lawyer walks into a boardroom and explains that a director's duty is to act in the best interest of the corporation - a distinct legal entity that exists independently of its shareholders.  The young Chairman says " You may have been to law school, but as a matter of practice we all know that the corporation is nothing more than its shareholders"  he continued "Corporations don't have interests. Only our shareholders have interests".  The lawyer, not wanting to contradict the Chair, asks "But what if the shareholder is a corporation.  In whose interest will you then act?".  "You're a very clever, old man, very clever", said the Chairman.  " But it's shareholders all the way down!"

The old lady and the young Chair propose a solution that begs exactly the same problem.   Both are guilty of the logical fallacy of infinite regression - where the validity of one proposition depends on the validity of the proposition which follows and/or proceeds it.   Leading to a series of infinitely cascading turtles and shareholders.

Consider that according to one survey, only 3.3% of the shares in the world's very large companies were held by Individuals or families.   The remaining balance is held by a very small number of corporations through a vast network of interposed corporations.   Nor, for the most part, are these corporations holding shares beneficially for individuals.  If there are individuals, they are more likely to be consumers who buy financial products from corporations than the ultimate beneficial shareholder.  

Under the standard assumption that the corporation is nothing more than the shareholder, if all these corporations are "owned" by other corporations who is the shareholder?   This leaves the directors with a practical problem - if the corporation is a fiction, then each shareholder that is also a corporation must logically be a fiction too.  If that's the case in whose best interest is the board supposed to act?   And what happens to the principal agent problem if there are no shareholders who qualify as principals?