ABSTRACT
This chapter explores the legal principles and institutions that reinforce the notion of shareholder primacy. It explains the dominant paradigm of corporate governance, the nexus of contracts model, which maintains that shareholders are the only residual risk-bearers of the firm and therefore deserve special legal protections from corporate change. The chapter also explores the institutional pressures on management to privilege the interests of shareholders above all other corporate stakeholders. It discusses the hegemony of these institutions and their philosophical underpinnings. Corporate governance "rules," culled from case law, corporate charters and bylaws, and customary workplace practices, provide guidance to managers in allocating power and resources within the corporation. Shareholders' status as "residual claimants" is the most significant organizing principle of the contractarian corporation. The contractarian approach holds that management is not accountable to these groups beyond the terms of their contracts and views any judicial or legislative attempts to further protect these stakeholders from corporate change as anathema.
