This chapter provides an introduction to the basic structure and themes of the book. We begin with a description of the basic features of a corporation. We then discuss the intellectual foundations of corporate governance, including an overview of the doctrine of shareholder primacy and the view that a corporation is merely a nexus of contracts. We begin to catalog some of the cracks in these foundations, focusing on the shortcomings of the long-standing arguments for the exclusive shareholder franchise. Next, we make clear that our the criticisms of shareholder primacy and the exclusive shareholder franchise do not question, but indeed make extensive use of, the basic principles of standard economics and social choice theory. In other words, both our critique and our positive theory come from within the very tradition that gave rise to the original arguments for shareholder control. We conclude the chapter with a detailed plan for the rest of the book.

This chapter sets out the first of two positive arguments for extending corporate voting rights to employees. The long-standing theory of the firm, in confronting the question why firms even exist, explains the separation of corporate insiders from outsiders in a way that allows firms to most efficiently carry out joint production. Those inside the corporation should have their preferences captured through more direct governance mechanisms such as voting, those outside the firm through processes like contract or regulation. Under this understanding of the firm, employees are, of course, the classic insiders, a conclusion that’s only reinforced by more recent work on the generation and flow of information within firms. The economic theory of the firm, then, provides a powerful argument for extending the corporate franchise to employees.

This chapter critically examines the argument for giving shareholders alone the right to vote based on their ownership of the corporate residual. The argument is that shareholders are only paid what's left over after all other contractual participants – employees, customers, creditors, and suppliers – have been satisfied. Because shareholders receive the marginal gains, they have the best incentives to exercise discretion on the part of the entire firm, and hence should be accorded ultimate control. Shareholders, though, are not the unidimensional profit maximizers used to get this argument up and running. Moreover, shareholders do not, by virtue of their relationship with the firm, have ready access to the information necessary to cast informed votes, and many shareholders – such as index fund shareholders – lack real incentives to seek out that information. Finally, this vision of shareholders as the sole owners of the residual is just descriptively wrong – employees, too, are invested in the long-term interest of the firm, cannot easily diversify that interest, and often possess firm-specific skills as well as contributions to the ongoing value of the business.

This chapter lays out the some of the basic aspects of how corporations identify and aggregate the preferences of their constituents. Unlike democratic political institutions, corporations restrict voting rights to one class of constituents – shareholders – when it comes to electing members of the board or authorizing major transactions. The remaining constituents – employees, creditors, customers, and suppliers – are limited to expressing their preferences through contracts with the corporation. The chapter concludes by exploring this corporate governance structure through three controversial issues – the system of one share, one vote; proxy access; and say on pay – to illustrate the fierce debates within corporate law as well as the creative possibilities permitted by the corporate form.

In the preface, we set the stage for the rest of the book. Corporations have a tremendous amount of power and play a major role in a number of contemporary issues, including income inequality, global warming, and the financial crisis. The principal theory of corporate governance – shareholder primacy – is well entrenched in law and practice, but its intellectual foundations are falling apart. Academic groups are split into different camps advocating for more or less shareholder empowerment. The traditional, law and economics arguments for the core governance feature – the exclusive shareholder franchise – have been revealed to rest on faulty assumptions and flawed reasoning. And both corporate governance theorists and corporate and economic luminaries are openly questioning the stability of shareholder primacy as a continuing regulatory norm. There are, however, a dearth of alternative approaches, so shareholder primacy lumbers on toward the point of crisis. It is time to assess where we are and offer a new way forward.

This chapter critically examines the argument that Arrow’s theorem supports giving the corporate vote to shareholders alone. We begin by laying out the argument and distinguish it from two, related arguments: the argument from politics and the argument for absolute delegation. We then show that the Arrow’s theorem argument is flawed on many fronts. Shareholder preferences are not, as supposed, homogeneous. Even if they were homogeneous, they would not translate into the kind of agreement on board candidates necessary to avoid intransitive corporate election results. Finally, restricting voting rights to shareholders gives up a fundamental condition of democracy in a situation where the likelihood and impact of intransitive results are already negligible.

In this concluding chapter, we note some of the societal problems associated with corporations, such as income inequality, and explore the relationship between those problems and the fact that shareholders have ultimate control of corporate decision-making. We then catalog the ways in which the theoretical underpinnings of this arrangement – shareholder primacy – appear to be in decline and the accompanying law and economics arguments in favor of the exclusive shareholder franchise have fallen apart. The chapter, and the book, conclude with some thoughts about how incorporating employees into firm governance is the best path forward.