Shareholder Model of Corporate Governance

Some Preliminary Clarifications

To the questions of why shareholders should have the right of control and the right to profits, there is a very simple answer: Shareholders are, by definition, the group that has these two rights. That is, whichever group has the right to control a corporation—which also allows it to operate the firm in its own interest—and the right to receive the profits of the enterprise is called “the shareholders.” The possession of these two rights also defines “ownership”: Ownership of a corporation just means having the right of control and the right to the profits. So to say that shareholders are the owners of a corporation is true as a matter of definition.

In most corporations, especially those that follow the American and British model, the shareholders—which is to say the group with the right of control and the right to profits—are investors or, more precisely, equity capital providers. It should be observed, though, that equity capital providers are not always the owners of a corporation. Some corporations are owned by employees, while others, commonly called cooperatives, are customer owned or supplier owned. Mutual insurance companies are owned by policyholders. Still, the investor-owned [Page 1908]corporation is the dominant form of corporate governance in the world today.

So the critical moral question is not why shareholders have the rights they do—this is a matter of definition—but why equity capital providers should be the shareholders. That is, why, should one kind of investor and not employees or some other group have the rights of shareholders? There is also the empirical question of why equity capital providers usually are the shareholders. That is, why has the investor-owned corporation become so dominant?

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