Shareholder Wealth Maximization and Social Welfare: A Utilitarian Critique

Many scholars and managers endorse the idea that the primary purpose of the !rm is to make money for its owners. This shareholder wealth maximization objective is justi!ed on the grounds that it maximizes social welfare. In this article, the !rst of a two-part set, we argue that, although this shareholder primacy model may have been appropriate in an earlier era, it no longer is, given our current state of economic and social affairs. To make our case, we employ a utilitarian moral standard and examine the apparent logical sequence behind the link between shareholder wealth maximization and social welfare. Upon close empirical and conceptual scrutiny, we !nd that utilitarian criteria do not support the shareholder model; that is, shareholder wealth maximization is only weakly linked to social welfare maximization. In view of the dubious validity of this sequential argument, we outline some of the features of a superior corporate objective—a variant of normative stakeholder theory. In the second article, we will advance and defend our preferred alternative and then discuss some institutional arrangements under which it could be implemented.