The Rule of Law and the Purpose of the Corporation

The three primary determinants of economic growth – physical capital growth, human capital growth, and technological innovation – rely on citizens’ confidence that private property rights are secure. Essential to that confidence is the rule of law.

Rule of law is an important catalyst for financial development. It allows for an effective judiciary, which is critical for the enforcement of legal contracts. Shareholders rely on the contractually created limited liability feature of equity to undertake risky, but value-enhancing, investments.  That feature is essentially a contract between shareholders and debtholders (and other stakeholders) providing that, when a company’s fortunes sour, shareholders … Read more

Should the Modern Corporation Maximize Shareholder Value?

Fifty years ago this year, Milton Friedman, later to be a Nobel laureate in economics, famously argued that corporate governance should focus solely on shareholder value maximization, while conforming to applicable laws and regulations.  That view was controversial then.  After years of dominance as a governance idea, shareholder primacy is once again controversial.  We argue that it is more or less still correct.

Recently, the Business Roundtable’s Statement on the Purpose of a Corporation commits the board to other stakeholders as well — including customers, employees, suppliers, and communities the company operates in. But importantly, if labor markets and product … Read more