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

How to Cure Too Big To Fail

The Dodd-Frank Act’s worthy objectives were to improve the safety, resilience, efficiency, and transparency of our financial system. Yet the law has drastically diminished the credit available to low-income Americans – the very people it was supposed to help. Equally important, community banks, which service disproportionately large shares of agricultural, residential mortgage, and small business loans, have been particularly adversely affected by Dodd-Frank. Specifically, since Dodd-Frank, there are 2,400 fewer small banks and community bank small business lending has dropped 21 percent. The CHOICE Act, recently passed by the U.S. House of Representatives, attempts to address many of these shortcomings.… Read more