An old lawyer walks into a boardroom of a public company 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 Chairperson says " You may have been to law school, but as a matter of practice we all know that the corporation is a fiction and nothing more than an aggregation of shareholders" he continued "Corporations don't have interests. Only our shareholders have interests and it's our duty to act in theirs"". 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 Chairperson. " But it's shareholders all the way down!"

This tale is based on one retold by Stephen Hawking: 

”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!”

The young Chair and the old lady are guilty of what’s known as the homunculus fallacy. 

By proposing a solution that begs exactly the same problem they have fallen into the bottomless pit 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 never ending cascading turtles and incorporated shareholders. There is no logical end and therefore no shareholder to whom the director owes his or her duty.

The Chair was caught by the incorporated shareholder paradox:

If corporations don’t exist, neither do their shareholders who happen to be corporations.

You can be excused for the confusion. On the one hand the chair thinks that corporations are merely fictions incapable of their own interests, but on other thinks that if a corporation happens to own shares it exists and has interests.

This is strange paradox. For those who argue loudest that corporations don’t exist and are nothing more than an aggregate of shareholders are, in most cases, corporations.

In a public company, the corporation and its shareholder are both likely to be incorporated.  Each with identical ontological status.  What separates them is their legal relationship and not the stuff they are made of.   In the eyes of the law, they are the same. The only thing that distinguishes them is how they make their money.

The Chair is not alone in falling for the paradox.  Even the most learned of legal scholars who reject any view of the corporation as an entity,  appear to accept that a corporation can be an aggregate of those non existent entities:  

I just can't wrap my head around the metaphysical abstractions required to think of the corporation as an entity--real or otherwise--rather than as an aggregate.

The nominalists consider the entity a metaphysical abstraction. But when those same entities are aggregated on a share registry they somehow become real. How scholars can be satisfied with the legal equivalent of transubstantiation but dismiss corporate realism is a mystery to me.

The paradox leaves the chair and his fellow directors in a bind - if the corporation doesn't really exists and each incorporated shareholder doesn't exist, in whose best interest is the board supposed to act?

Desperately seeking to reground their duty, the Chair asks "But surely, there is a human somewhere on the register ". D

Not according to one survey by Peetz and Murray. Based on their analysis only 3.3% of the shares in the world's very large companies were held by humans. Nearly all the shares were held, through a vast network of interposed entities, by a very small number of corporations. And, it's not necessarily the case these these corporations are acting as trustees on behalf of humans. For the most part, these corporations don't hold shares on trust for individuals.  Rather, shares are bought as inputs into their business models to create financial products to be sold to individuals to produce profits to be consumed by other corporations. Just like a steel company buys iron ore, insurance companies buy shares. The difference is only one of business model.

Exasperated, the chair says "we'll act for the three percent then."

The business woman had fallen into the trap set by the erroneous assumption that corporations don’t exist.

"You misunderstand the problem" responded the old lawyer. "all shareholders exist in the same way as all corporations exist”. Her denial of corporate existence had created a misplaced sense of duty to any human on the corporate register.

“The law does not require that you act for the benefit of individual or incorporated shareholders. Your responsibility is to this corporation. It may be an artificial legal person, but it's no fiction. It exists and what exist will cease to exist if the Board fails in its duty.  That's the problem this board needs to solve" The lawyer continued:

The duty to act in the best interest of the corporation is a duty to create surplus value for the corporation.

That doesn't mean its interests can't intersect or correspond with the the interests of shareholders and others. But, the interests of the corporation in sustaining and maintaining its own existence as an entity must come first".

The chair, interrupted "But why? What about our purpose and duty to shareholders?".

The lawyer paused, "There is no purpose , or profit without existence. What ever the desire of the shareholder, it is contingent upon and subordinate to the long term survival of the corporation.  That's the standard that the law requires."