The Principles Of Primacy Theory In Corporate Law

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The principle of profit maximisation or also known as the shareholder primacy theory is a dominant principle in corporate law. It leads the corporation decision-makers focus on the shareholders’ interests.
The Berle and Dodd’s debate in 1930s is where the primacy theory originated. The argument was based on the premise of that shareholders were owners of the company and directors were agents or trustees of these owners.
Berle thought that corporations should be operated for shareholders’ duties. However, Dodd contended that as economic organizations corporations have “a social services as well as a profit-making function", and directors “should concern themselves with the interests of employees, clients, and general public". Berle once again opposed with the view that the managerial accountability could be cut down by increasing managerial discretion. Moreover, he believed that it was impossible to directors to be accountable to all constituencies.
In 1919, the Michigan Supreme Court’s decision in the case of Dodge v Ford Motor Corp stated that, a business corporation is organised and carried on primarily for the profit of the stockholders.
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It was concluded that: “shareholders are the only stakeholders of a corporation who, in seeking to maximise their own claim, simultaneously maximise everyone’s claim.". It was said that: to generate maximum value for shareholders-is in principle the best means also of securing overall prosperity and welfare." It is not difficult to understand that how shareholder primacy works for increasing social wealth. For example, if shareholders’ interests increase, the better payment and safer workplace will be provided to employees a good environment protection will be concerned when making business decision; and the customers will be given a lower costs and better quality products. Taking all the matters as a whole, the social wealth will be enhanced
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