Dear Wal-Mart, Shareholders *own* the corporation.

Elizabeth Nowicki —  5 April 2007

Today’s WSJ had an article titled “Wal-Mart Apologizes to Groups That Were Focus of Surveillance,” which noted that Wal-Mart apologized for responding to large institutional shareholders as “threats.”  Obviously Wal-Mart realized a bit too late that it was absurd, from an investor relations standpoint (and a corporate governance standpoint), to refer to the owners of the corporation as “threats.”

That said, I am not shocked by the reference to large (activist) shareholders as “threats,” and I partially blame corporate lawyers for that perspective.  My view is that, too often, outside counsel forgets that, actually, the corporation is the client, not the CEO/GC who hired outside counsel.  My impression is that often outside counsel tries to “protect” executive officers and the board from large shareholders, as opposed to trying to agitate *for* the shareholders.  Of course, we all know why.  Who hires and fires outside counsel (outside accountants, investment banks, etc.)?  They know where their bread is buttered.  The savvy lawyer/accountant/banker is going to try to keep the person who hired her happy.

Perhaps, then, the solution is to have shareholder ratification of outside counsel….  (Just a random thought that came to me as I typed – no prior thought given.)  Kudos to Wal-Mart for at least recognizing their shareholder relations gaffe.

4 responses to Dear Wal-Mart, Shareholders *own* the corporation.


    I think “own” is a fairly convenient shorthand here, but it occasions a lot of misunderstanding. The complicated reality is that shareholders do NOT “own” the corporation. Nor do they participate in a “democracy” just because they “vote” on some matters. Shareholders can do nothing with the company itself that normal owners can do. They cannot sell or buy or give away the company’s assets, etc. All they have is a piece of paper–a security, not a deed–giving them a probabilistic right to certain payments by the corporation and a share of its assets upon dissolution. That’s a far cry from ownership, it seems to me. Now this is not to say that shareholders aren’t residual claimants, mind you. Those claims that shareholders do possess do amount to a claim on residuals. But just saying that shareholders “own the corporation because that is the way the world is and has been” doesn’t make it so. (By the way–same goes for voting: The ability of shareholders to decide anything by voting in the sense that we usually think of majoritarian elections working is extremely limited).

    Elizabeth Nowicki 5 April 2007 at 1:15 pm

    Thom, thanks for the comment.
    If a corporation is a nexus of contracts, some of those contracts are *with* the shareholders (consider Bylaws, cert. of inc., implied contracts such as the promise by the directors to serve in good faith). And those contracts give to the shareholders primacy. Those contracts bind directors to act for the interests of their shareholders. Therefore, in my view, if the shareholders are complaining, directors have the obligation to listen.

    Professor Greg Alexander and I had some super conversations on this topic in the context of “good faith.” What would “contract theory” folks think of my interpretation of good faith? The conclusion I came to was that even the contract nexus folks had to agree that good faith could reasonably be read into the contracts as a gap filler. (Meaning, in behaving in accordance with the bylaws and the cert. of inc., the directors will act in good faith as the bylaws implicitly require.)

    Your comment that “I realize that most folks think shareholders “own” the corporation because they have voting rights and are the residual claimants” puts the cart before the horse, in my opinion. In my world, shareholders have voting rights *because* they are owners, and they have residual claims *because* they are owners. It is not the fact that those to facets exist that leads to the “conclusion” that s/h are owners.

    Shareholders “own” the corporation b/c that is the way the world is and has been. If a person does not like that, let them create their own form of business association and call it “Fred” or something.

    I need to poke around and see how others respond to the contractualists/contractarians (I recalling debating which word was proper, and I think I concluded both would work….).



    I realize that most folks think shareholders “own” the corporation because they have voting rights and are the residual claimants. People who view the corporation as a nexus of contracts, though, tend to dispute that notion. (What would it mean to “own” a collection of contracts among suppliers of capital, suppliers of managerial talent, etc.?) Prof. Bainbridge’s director primacy model, for example, asserts that “the corporation is a vehicle by which the board of directors hires various factors of production. Hence, the board of directors is not a mere agent of the shareholders, but rather is a sui generis body — a sort of Platonic guardian — serving as the nexus for the various contracts making up the corporation.” (See here.) Under that view, it would seem that trouble-making shareholders shouldn’t occupy any privileged position vis-a-vis the board.

    I’m interested in your thoughts on that. I must say I find Bainbridge’s conception of the corporation appealing, but (being only a dabbler in corporate law) I’ve never heard the arguments against it. Care to enlighten?

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  1. ® - April 5, 2007

    Dear Elizabeth, Shareholder’s Don’t *Own* the Corporation…

    Over at Truth on the Market, Elizabeth Nowicki offers up a post entitled Dear Wal-Mart, Shareholders *own* the corporation. In said post, she opines:Today’s WSJ had an article titled “Wal-Mart Apologizes to Groups That Were Focus of Surveillance,…