Since Ronald Coase's famous article The Nature of the Firm appeared over six decades ago,1 both economists and legal scholars have devoted considerable attention to the theory of the firm.2 Over time, this body of work generated a substantial literature providing both positive and normative insights into, inter alia, the internal governance institutions of firms.3 Although the various theories of the firm developed in that literature can be classified in various ways, and while some defy classification, two basic systems of classification capture most of the competing theories (see Figure 1). Along one axis (the "Means Axis"), theories of the firm are plotted according to whether they emphasize managerial or shareholder primacy. Older theories at the shareholder primacy end of the spectrum posit that shareholders own the corporation.4 Accordingly, directors and officers are mere stewards of the shareholders' interests. A more recent variant, known as the "nexus of contracts" or "contractarian" model,5 which is one of Coase's many progeny, denies that shareholders own the corporation.6 Instead, it argues that shareholders are merely one of many factors of production bound together in a complex web of explicit and implicit contracts.7 Contractarian theory nevertheless continues to treat directors and officers as contractual agents of the shareholders, with fiduciary obligations to maximize shareholder wealth.8 Shareholders therefore retain a privileged position among the corporation's various constituencies, enjoying a contract with the firm granting shareholders ownership-like rights, such as the vote and the protection of fiduciary obligations by directors and officers.
At the other end of the means axis lies managerialism. Managerialism perceives the corporation as a bureaucratic hierarchy dominated by professional managers.9 Directors are figureheads, while shareholders are nonentities.10 Thus, under managerialist models, managers are autonomous actors free to pursue whatever interests they choose (or society directs).11 Although the managerialist model long dominated corporate law scholarship and remains influential in some other disciplines,12 it no longer has much traction in the legal academy.13
Along the other axis (the "Ends Axis"), models can be plotted according to the interests the corporation is said to serve. At one end of the spectrum are models contending that corporations should be run so as to maximize shareholder wealth. At the other end are stakeholderist models arguing that directors and managers should consider the interests of all corporate constituencies in making corporate decisions.14 Not surprisingly, this axis reflects the division in corporate law scholarship along public-private lines.15 Proponents of shareholder wealth maximization typically treat corporate governance as a species of private law, such that the separation of ownership and control does not in and of itself justify state intervention in corporate governance. In contrast, stakeholderists commonly treat corporate governance as a species of public law, such that the separation of ownership and control becomes principally a justification for regulating corporate governance so as to achieve social goals unrelated to corporate profitability.16
Essentially, all of these models are ways of thinking about the means and ends of corporate governance. They strive to answer two basic sets of questions: (1) as to the means of corporate governance, who holds ultimate decisionmaking power? and (2) as to the ends of corporate governance, whose interests should prevail? When the ultimate decisionmaker is presented with a zero-sum game, in which it must prefer the interests of one constituency class over those of all others, which constituency wins? Any model that commands the loyalty of one or more generations of scholars doubtless has more than a grain of truth. Yet, as we shall see, none of the standard models is fully satisfactory. …