Professor Sarah Haan on the False Narrative of Shareholder Passivity In an article for the ECGI blog, Haan challenges a central assumption of early 20th century corporate law.

By Law Communications
March 7, 2024

Washington and Lee law professor Sarah Haan has published a blog article with the European Corporate Governance Institute (ECGI). The piece challenges a central assumption of early 20th century corporate law – namely that shareholders are “naturally or rationally passive.”

The idea of shareholder passivity gained wide traction after Adolf Berle Jr and Gardiner Means invoked it repeatedly in their 1932 book, The Modern Corporation and Private Property.  Decades later, the law and economics movement refashioned shareholder passivity as ‘rational apathy.’ In Berle and Means’s conception, shareholder passivity was irresponsible and blameworthy, but also inevitable in light of the separation of ownership and control. In the law-and-economics view, shareholder passivity evidenced the ‘free rider problem’ and was explained by incentives operating on homo economicus. It was rational decision-making by utility-maximizing investors and, therefore, a good (and efficient) thing. After shareholder passivity was reconceptualized by the law and economics movement, it ceased to be a governance problem in need of a legal solution.

I argue that the ‘Passivity Thesis’ was descriptively and normatively flawed. In both its New-Deal-era and law-and-economics versions, the Passivity Thesis located all of the responsibility for passivity in shareholders themselves, deflecting attention away from the role of corporate law in promoting or constraining shareholder participation. In fact, there are many reasons to believe that shareholder governance might have developed differently—that American shareholders might have taken a more active role in corporate organization—if corporate law had created mechanisms to make this possible.

Haan’s article is based on a talk she gave at the ECGI conference “The History of Business Law and Governance.” There she presented a forthcoming book chapter, “The Pathology of Passivity: Shareholder Passivity as a False Narrative in Corporate Law,” which will appear in Hidden Fallacies in Corporate Law and Financial Regulation, due out this year.

Haan’s article is available on the ECGI website.

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