Shareholder Primacy Addresses The Inefficiencies Of The 1960's

Establishment of a takeover market was an attempt to make corporations more efficient by a way of creating a market where any corporation could be bought or sold. Taken over corporations would be downsized to achieve greater efficiency and to recoup the costs incurred as a result of a takeover, while a threat of being taken over would force the managers of other corporations to downsize as well. As a result of the takeover market, managers of corporations started focusing on the performance of the stock price. According to Ho (2009), corporations became exchangeable stocks: “The takeover movement culturally commoditized and transformed the very definition and purpose of a public corporation: the corporation became its quickly exchangeable stock

What is efficiency? According to Ho (2009), “For many investment bankers, efficiency referred to the set of practices which most quickly and cheaply translates corporate actions into rising stock prices; that is, the ideal corporation is one where all corporate practices lead directly to increasing stock prices.” (p. 163). Essentially, efficiency is something that leads to a better performance on the stock market. Furthermore, Lazonick and O'Sullivan (2000) stated that “In the name of ‘creating shareholder value’, the past two decades have witnessed a market shift in the strategic orientation of top corporate managers in the allocation of corporate resources and returns away from ‘retain and reinvest’ and towards ‘downsize and distribute’.” (p. 18). As it was previously mentioned, the major strategies employed by managers to achieve efficiency are that of downsizing and distributing. How does downsizing have a positive effect on the stock price? According to Lowe (1998) "Consistent with the leaner and meaner mantra is the prevailing belief that downsizing will improve financial indicators and ultimately improve stock price performance." (p. 130). Downsizing through the means of reduction of expenses leads to a greater performance on the stock market as corporations are perceived to be more organized and thus more profitable. Furthermore, shareholder primacy also prevents some runaway agency costs. According to Stout (2002), shareholder primacy prevents directors from pursuing their own agenda: “Put differently, shareholders and stakeholders alike are thought to be made better off by a rule that prevents directors from pursuing strategies that reduce share price whenever this can be rationalized as somehow serving the often-intangible interests of other