Faculty of law blogs / UNIVERSITY OF OXFORD

Shareholder Primacy in the Time of Coronavirus


Akshaya Kamalnath
Associate Professor at the Australian National University College of Law


Time to read

3 Minutes

It has become fashionable in these troubled times to write about how the coronavirus (or Covid-19) situation shows that the writer’s favourite policies are the best ones. Trite as it may be, I don’t want to miss the opportunity to explain and defend shareholder primacy as a theory / principle followed in corporate law.

Do companies have an ethical obligation to take care of employees during the coronavirus pandemic? If not, why are companies asking employees to work from home and even paying employees when they are not coming in to work? Even companies in the gig economy like Uber are stepping up and offering unexpected support to their drivers whom they have refused to consider as employees. For instance, Uber announced that it would offer 14 days of financial assistance to drivers affected by Covid-19. Similarly, to accommodate the demand from workplaces and educational institutions to switch to working online, tech companies like Google, Microsoft, and Zoom have begun offering some of their products’ features for free. Why are they going well beyond what current laws require them to do?

Have they begun to embrace stakeholderism (the idea that companies should service all stakeholders equally) and, if so, can we expect such continued benefits being offered to employees in need even after the pandemic has passed? I’d answer both parts of this question in the negative. In my view, these companies are guided by shareholder primacy (the idea that shareholder interests have primacy over that of other stakeholders).

The first and most obvious reason is that shareholders would want directors of the company they have invested in to step up to the occasion when a crisis as big as a pandemic is staring us in the face. While it is normally assumed that shareholder interests translate into profit-making or wealth maximization, intelligent directors would understand that a crisis calls for a different understanding of what shareholders want. The second possible reason for companies to act in the interests of stakeholders at this time is to enhance their reputation. A company making accommodations during a time of crisis might forego some profits in the short-term but will have reputational gains in the long term. The consideration of reputational incentives is not to suggest that companies acting altruistically should be seen as cynical. On the contrary, it is laudable that the directors of these companies have acted in the interests of the company by taking care of relevant stakeholders when it was most needed. The fact that company reputation was one of the variables in the calculus should be noted positively because that shows that shareholder primacy ensures companies act in the interests of other stakeholders when it is most essential. A third reason is that by offering benefits to employees (or independent contractors as in the case of Uber’s drivers) or customers as in the case of the tech companies, the companies have ensured that the relevant stakeholders (customers and employees / independent contractors) would want to work or continue to work with these companies.

If shareholder primacy leads to beneficial outcomes, why is it so reviled? Shareholder primacy is often confused with a myopic focus on short-term profits. To be sure, the company law of most countries requires directors to act in the best interests of the company and, in determining which interests within the company are to be prioritised, to give primacy to that of shareholders. The default assumption is that most shareholders would want to maximise the wealth that they have invested in the company. However, it is left to directors to consider other relevant interests where they are in the best interests of the company. As I have argued above, it was clearly in the interests of the company to prioritise various stakeholders’ interests and act accordingly, and in this instance they have acted accordingly. Not every situation has such an easy answer and so it is left to directors to choose the course of action best suited to the company, with the interests of shareholders being ultimately prioritised.

What happens after the pandemic has passed? While the coronavirus situation is a big crisis and companies have been stepping up, decisions prioritising the interests of one stakeholder over those of others are routine, even in calmer situations, or where a company alone is facing a crisis of some sort. Take for example, employees’ complaints about toxic work culture and harassment, which we now know was the case with Uber in the past. Often the response is to keep the issue under wraps or refuse to address the particular stakeholder’s needs. This unsavoury behaviour cannot however be attributed to either shareholder primacy or stakeholderism. We would expect that shareholders would want companies to clean their house as soon as they know there is trouble so that they are not at the receiving end of the law suit at a later date and, more importantly, because shareholders would want talented employees to be retained within the company. Unfortunately, the unsavoury behaviour is simply an expression of human nature in some cases and better incentives to prevent such behaviour need to be devised. Similarly, for concerns of other stakeholders, the environment for instance, environment protection and climate change laws would constrain directors’ actions rather than relying on principles of either shareholder primacy or stakeholderism to do the job.

All this is to say that there are problems with how companies are run and we need innovative solutions to create better incentives rather than falling back on paying lip service to stakeholderism as the Business Roundtable recently did in its 2019 statement.

Akshaya Kamalnath is Lecturer in Corporate Law at Auckland University of Technology.


With the support of