Jeffrey Miron
According to new research,
The mainstream theory of corporate governance in the United States holds that the primary responsibility of the board of directors and management is to maximize the wealth of shareholders. This is the theory of shareholder primacy. An alternative theory is that directors and management should consider all stakeholders, including employees, customers, and communities.
In 2017, the Nevada legislature clarified that shareholder primacy does not apply in Nevada and that directors and officers are protected from shareholder litigation.
Our research finds that this law had striking adverse effects on the quality of governance of firms incorporated in Nevada: Firms adopted policies that made it more difficult for shareholders to influence management, more relatives of executives joined corporate boards, the proportion of independent directors fell, and director attendance dropped. Additionally, the value of firms and the efficiency of their investments declined, and firms’ environmental and social performance decreased significantly.
Shareholder primacy is not perfect, but government limitations make it worse.