Reassessing the End of History: Directors’ Duties and Shareholders’ Rights in Comparative Context

More than two decades ago, Henry Hansmann and Reinier Kraakman declared ‘The End of History for Corporate Law,’ arguing that jurisdictions around the world were converging on a ‘standard model’ of shareholder primacy. Their article served as a provocation to ‘stakeholder’ oriented legal scholars, who in the years following have forcefully contested Hansmann and Kraakman’s claim. Surprisingly, neither Hansmann and Kraakman, on the one hand, nor their various critics, on the other, have provided much in the way of empirical evidence to support their respective arguments. My forthcoming article ‘Reassessing the End of History: Directors’ Duties and Shareholders’ Rights in Comparative Context’ engages this debate by presenting a quantitative study of directors’ duties and shareholders’ rights in 60 jurisdictions around the world. The results of my study are as follows: First, consistent with Hansmann and Kraakman, corporate law appears to have converged on a standard model of shareholder primacy—defined principally by democratic accountability to shareholders. Second, although the content of fiduciary duties varies across jurisdictions, these duties have little influence on corporate purpose or strategy. Finally, the standard model of shareholder primacy differs meaningfully from Delaware law, which is a surprising outlier among global jurisdictions.

Convergence on Shareholder Primacy

Drawing on an original, multivariate database of 60 jurisdictions around the world, I assess whether corporate law has in fact converged on a shareholder-primacy model, or whether diversity in corporate governance persists across jurisdictions. The evidence largely supports Hansmann and Kraakman’s thesis: Specifically, 43 of 60 jurisdictions (71.7%) grant shareholders powerful rights to remove and replace directors, and 48 of 60 jurisdictions (80%) restrict the voting franchise to shareholders alone. Under this institutional arrangement—in which shareholders have the sole power to select (and replace) directors—it is highly unlikely that directors would prioritize non-shareholder ‘stakeholder’ interests. Interestingly, Delaware is an exception from this emerging global consensus, as shareholders of Delaware corporations face significantly greater obstacles to immediately removing directors (as discussed below).

Fiduciary Duties

A common response to claims regarding the ascendence of shareholder primacy is that, in many jurisdictions, directors’ fiduciary duties are not limited to shareholders, but instead encompass a broader range of non-shareholder constituencies. Indeed, my findings confirm significant variation in how fiduciary duties are framed. In 34 of 60 jurisdictions (56.7%), fiduciary duties are limited—either explicitly or implicitly—to maximizing the financial interests of the residual owners of the firm. However, in 26 of 60 jurisdictions (43.3%), fiduciary duties encompass broader stakeholder interests, including creditors, employees, and even the environment.

Notwithstanding this variation, I argue that the practical effect of fiduciary duties on strategic decision making is minimal. Institutional and financial incentives, including the realities of corporate democracy, lead directors to prioritize shareholders regardless of broader legal mandates. My home jurisdiction of Canada serves as a representative example. Although Canadian law permits directors to consider non-shareholder interests, evidence suggests that they overwhelmingly focus on maximizing shareholder value. For empirical evidence on this issue, see my article ‘To Whom Are Directors’ Duties Owed? Evidence From Canadian M&A Transactions.’

Delaware’s Paradox

Although corporate law is converging on a shareholder primacy model, it is not converging on the Delaware model which so often preoccupies U.S. scholars. Despite its prominence and (presumed) international influence, Delaware is an outlier from the emerging global consensus of strong shareholder rights and delimited board autonomy. As a structural matter, Delaware assigns ultimate authority to the board of directors, while limiting shareholders’ ability to replace the board on short notice. Delaware also grants directors considerable discretion to resist unsolicited takeovers.

At the same time, however, Delaware requires—more clearly and emphatically than most jurisdictions in my database—that directors exercise their authority for the financial benefit of shareholders. Thus, although Delaware directors enjoy broad discretion to manage the corporation as they see fit, they are limited in their exercise of this discretion to maximizing shareholder value, and are not permitted to benefit stakeholders to the financial detriment of shareholders. This combination of broad director authority with a narrow duty to shareholders has been aptly described by Stephen Bainbridge as the ‘director primacy’ model. The concept of director primacy (as distinct from shareholder primacy) usefully differentiates Delaware from other jurisdictions. Although recent amendments to Delaware law have eroded this board-centric model, Delaware remains distinctive in international context.

Conclusion: Structural Explanations for Convergence and Divergence

What explains the differences between the shareholder-centric model observed in many jurisdictions and Delaware’s more director-centric approach?  Although the evidence in my database does not answer this question directly, I speculate that different corporate governance models are shaped by their economic contexts—most notably, international variation in corporate ownership concentration.

In much of the world, many (if not most) public corporations are dominated by controlling shareholders, such as wealthy families, financial institutions, or even national governments. In the U.S., however, the ownership of large corporations has historically been characterized by diffuse, anonymous shareholders with limited ability to act collectively. For a number of reasons, shareholder primacy is well suited to the reality of strong shareholders, whereas director primacy is better suited to the reality of diffuse shareholders. Interestingly, the recent increase in ownership concentration and the rise of dominant entrepreneurial shareholders in the U.S. has coincided with a weakening of director primacy in Delaware. This shift is consistent with my broader thesis that corporate law tends to adapt to its underlying context. In order to be practically effective, economically efficient, and responsive to needs of business, corporate law must ultimately reflect institutional reality.

Camden Hutchison is an Associate Professor at University of British Columbia (UBC), Faculty of Law.

The author's paper can be found here.