Shareholder Primacy: Paradigm or GroupThink

PeterTunjicGuest post from Peter Tunjic – Commercial lawyer, idea inventor, framework builder, business designer, board advisor and advocate and defender of free corporations. Peter writes at On Directorship and is “re-inventing the boardroom from capitalism’s forgotten first principles.” Thanks to Peter for permission to republish his following thought provoking post. Comments are always welcome but must come to me by e-mail so I can filter out the spam. 

Shareholder primacy is a norm of corporate governance that requires 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.”

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

How can there be freedom to choose the objectives of corporate governance, when the argument in favor of shareholder primacy is reduced to comparisons between maximizing shareholder value and “other notions such as ‘democracy’ and Freedom of Religion” and even ‘capitalism’”?

Sadly, it may take more than good argument to displace shareholder primacy.

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 of groupthink, 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 market  and 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.

He could be right, but the consequences of his directive being wrong could also be devastating. But this possibility neither tempers Bebchuk’s encouragement for risk taking in the form of increasing activist attacks nor his unbounded conviction that he is right. I’m not saying the Professor is suffering from an illusion of invulnerability. Rather, his public statements give sufficient cause to wonder.

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 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,.. 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.

This is a moral justification for shareholder primacy.

Social responsibility is code for morally right.  Friedman argues that the morally right thing for business to do is make as much money for shareholders as possible.  He even warns that the very foundations of a free society are threatened by any other moral code of the corporation.   And, to this day no other management idea creates the same sense of moral panic and outrage when questioned.

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, increasingly demands 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 than those with stellar records, nothing will dissuade the corporate governance industrial complex.

Out-Group Stereotypes

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, 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 other 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: How Putting Shareholders First Harms Investors, Corporations, and the Public. 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.  — Comment

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.   — Comment

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.  — Comment

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 godfathers 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.

No one would openly admit self censorship.  But it is curious that after a month of promoting this essay, it remains invisible in the twitter sphere.

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.

The continuum of pressure on people who don’t conform to the shareholder first view of corporate governance ranges from none too subtle personal threats to the worst form of institutional pressure – 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 publicly explain their action in “deviating” from an unvalidated 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 “mind guards.”  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 phenomenon of business networking site 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 on Linkedin:


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


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


Since publishing Governing and Directing:  Are they Different  an owner or moderator of a linkedIn group has taken it upon themselves to  block me from posting to all Linkedin groups without approval from the owner or moderator.  As result, many of my posts and comments continue to be pending approval weeks after submission.

[update: whilst some Linkedin groups have allowed me to post this article, others still have the article pending review after months, whilst others have decided not to publish the article  –  What is clear is that there are moderators out there who believe they need to protect their readers from this article.]

Corporate Governance: Paradigm or GroupThink? 

My challenge is that if you’ve found this essay and read this far you’re either an outsider to the corporate governance industrial complex or I’m over-stating the extent of the problem.

Time will tell if the current norm of corporate governance is a “scientific” paradigm that will save capitalism or a destructive form of groupthink.

In the meantime, the presence of all eight symptoms of groupthink suggest that we all should be alert and perhaps even a little alarmed by the prospect that the success of the shareholder value norm of corporate governance has more to do with the principles of psychology than the principles of capitalism.


Some may read this piece as an attack on shareholder primacy. This is not my intent.  I’m more interested in supporting alternative models of corporate governance than disproving the existing norm. Maximizing shareholder value doesn’t have to be a myth for there to be a better way to govern and direct corporations. But, under the influence of groupthink, you might never get to choose the best way to compete.

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3 Responses to Shareholder Primacy: Paradigm or GroupThink

  1. James McRitchie 01/08/2014 at 8:36 am #

    Find many more comments and participate in ongoing discussion by joining the group “Corporate Governance Research” on Linkedin at See Shareholder Primacy : Paradigm or Groupthink? at

  2. James McRitchie 12/18/2013 at 8:50 am #

    I found the article very interesting but I’m not sure what the “corporate governance industrial complex” really is. Sarah has pointed out the big differences between the US and Europe on this and Ruth’s point about the ambiguity in the definition is very important.

    I then went on to read Peter’s article on governing and directing

    which made me want to cheer as I haven’t found anyone else discussing it properly. The line is getting blurred and you can tell this from the language: functional areas of management are now co-opting the word governance (sales, governance, marketing governance etc) I’m in the process of writing a paper on whether this really matters (I had a good argument about this with Sir Adrian Cadbury recently: he thinks it matters very much!) I also like Peter’s model and his critique of LeBlanc’s paper.

    By the way, “Jaw jaw” was a Winston Churchill quote, I do wish people would attribute properly 🙂
    By Laura Spira

  3. James McRitchie 12/18/2013 at 5:43 am #

    Posting some comments from Linkedin community.

    Sarah Wilson
    Founder, CEO

    I read all the way to the bottom, some interesting ideas. But, it misses the point that international owners of US companies do not come from a “maximise shareholder value at all costs” paradigm, UK/EU company law requires firms to take account of wider interests and this is something that the owners understand. US academic literature often omits international perspectives because of the nature of getting funding/into journals, so my international academic friends tell me. That’s disappointing because half the investing world is not from the USA. But it is also a fallacy to suggest that #corpgov is “scientific” and can be reduced to equations – it can’t, we’re not measuring objects which conform to the principles of laws of physics, we are dealing with subjective, qualitative issues – human beings.

    There can be groupthink on all sides of the #corpgov debate, but it is time to sit down and talk about the issues based on mutual respect, not keep throwing brick. Positions are becoming increasingly aggressive and polarised which is not helpful. Jaw jaw is always better than war war.

    Ruth Bender
    Corporate financial strategy | Corporate Governance | Lecture & research at Cranfield School of Management

    I agree Sarah’s point, but I also think that one of the problems is how we define Shareholder Value. The problem is that Shareholder Value is often treated as synonymous with share price, whereas in fact it is no such thing.
    If you go back to what Alfred Rappaport wrote about it back in 1986, he said that there are seven drivers of Value, one of which is to maintain above-average business performance over as long a timescale as possible. Once you factor this in, Shareholder Value makes a lot more sense; you don’t get long-term outperformance unless you’re paying attention to all of the stakeholder constituencies, not just the share price.

    James McRitchie
    Publisher, and consultant

    Very nice Sarah. I’m not sure how much US owners actually some from a “maxamise shareholder value” standpoint. Certainly given a lot of lip-service and often quite harmful but few would add “at all costs.” Love the “Jaw jaw is always better than war war.”

    By the way. I just put up Peter’s essay as a guest post at It does sometimes read a little like brick throwing but, for me anyway, it stimulated some second thoughts.
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