Maximizing the Wealth of Fictional Shareholders: Which Fiction should Directors Embrace‪?‬

ABSTRACT Corporate directors are generally committed to the social norm of maximizing the wealth of their corporation's common shareholders. Their current practice is to simplify their investment decisions by positing a generic fictional shareholder who is undiversified in his investments as the person to whom they hold themselves accountable. In this Article I discuss this fictional undiversified shareholder concept and compare it with three alternative fictional characterizations that differ from it and among themselves only in the extent of assumed investor diversification, and which could each serve this same analytical function. These three alternatives are the fictional diversified shareholder, the fictional equity-only diversified shareholder, and the fictional corporation-specific diversified shareholder concepts. I also consider a hybrid characterization that would include both fictional undiversified shareholders and fictional diversified shareholders.