Director primacy
Encyclopedia
Director Primacy is a theory of the firm
that was introduced by Stephen M Bainbridge (Professor - UCLA School of Law
) in an article in Northwestern University Law Review in 2003 Vol 97 No 2.
He argues that traditional firm theory is based on a false premise
that the board's
authority derives from the owners
. He argues that while the board is appointed by the owners, the nature of the appointment is one in which the power to be exercised is not under the control of the appointing members. Once appointed then, directors are almost unfettered in their exercise of their powers. However, they are subject to overarching fiduciary responsibility which aligns their required actions with a shareholder
wealth maximization principle.
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
that was introduced by Stephen M Bainbridge (Professor - UCLA School of Law
UCLA School of Law
The UCLA School of Law is the law school of the University of California, Los Angeles. It has been approved by the American Bar Association since 1950. It joined the Association of American Law Schools in 1952.- History :...
) in an article in Northwestern University Law Review in 2003 Vol 97 No 2.
He argues that traditional firm theory is based on a false premise
False premise
A false premise is an incorrect proposition that forms the basis of a logical syllogism. Since the premise is not correct, the conclusion drawn may be in error...
that the board's
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
authority derives from the owners
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
. He argues that while the board is appointed by the owners, the nature of the appointment is one in which the power to be exercised is not under the control of the appointing members. Once appointed then, directors are almost unfettered in their exercise of their powers. However, they are subject to overarching fiduciary responsibility which aligns their required actions with a shareholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
wealth maximization principle.