rodrik169_boardroomconferencemeetingtable Getty Images

New Firms for a New Era

In recent years, large corporations have become increasingly aware that they must be sensitive not only to the financial bottom line, but also to the social and environmental effects of their activities. But societies should not allow firms' owners and their agents to drive the discussion about reforming corporate governance.

CAMBRIDGE – Firms are the cornerstone of the modern economy. The bulk of production, investment, innovation, and job creation takes place within them. Their decisions determine not only economic performance, but also the health and wellbeing of a society. But who should govern firms, and on whose behalf should those decisions be made?

The conventional theory under which our contemporary economies operate is that firms are governed by – or on behalf of – investors. This theory posits a clear separation between owners and employees – between capital and labor. Investors own the firm and they must make all the relevant decisions. Even where this is impractical, as in larger firms with multiple investors, the presumption is that managers are “agents” of the investors – and of investors alone.

This theory of the firm rests on two fictions. First, investors are the only ones “invested” in the firm, and hence the only ones taking risks. Second, markets are competitive and frictionless, so that workers (and others closely affected by firms’ decisions, such as suppliers) can leave and go elsewhere if they do not like how a particular firm treats them.

https://prosyn.org/1hWdSif