Directors’ Versus Shareholders’ Primacy in U.S. Corporations Through the Eyes of History: Is Directors’ Power “Inherent”?

In the debate about the internal governance of public firms some authors justify the current pyramidal organizational structure of American corporations (shareholders at the base, directors in the middle and officers at the peak) using the historical argument, the so called “inherence thesis,” thereby rejecting the “erosion doctrine” affirmed by Bearle and Means. The argument was originally brought by Werner and recently used by Bainbridge: the current governance allocating the primacy to directors and officers is a natural characteristic of big American firms; legal norms have remained constant and unchanged since the first business corporations; therefore this is the inherent nature of public corporate governance structure and there is no reason to change the pyramid, no reason to strengthen the role of shareholders or to require a different legal legitimacy for this structure of power. However, historically, the “inherence thesis” contains a few inaccuracies. Tracing the origins of the first business corporations, the article will show that from mid-eighteenth century until the beginning of the twentieth century, the practice in the United States was quite varied: some charters granted the shareholders the power to appoint both the directors and the officers, as well as other managerial powers; other charters, instead, granted shareholders only the power to appoint the directors, and the directors would then select the officers. Moreover, commentators and case law until the beginning of the twentieth century uniformly and clearly argued the supremacy of the shareholders’ meeting over the board and the managers, and directors used to be qualified as “executive agents” of the shareholders subject to the latter’s will. Indeed, widening the horizon to Europe, the same concept of shareholders’ primacy within public corporations was shared simultaneously in the United States and Europe. The argument in this article is that the internal governance of public corporations has common roots in Europe and the United States. Hence, the American business corporation did not begin with its current pyramidal structure or with directors’ primacy. The latter seems to have been a legal development starting in Europe and then in the United States, at the beginning of the twentieth century, but only subsequently taking a more marked pyramidal form in the United States.