The Maximands of Corporate Governance: A Theory of Values and Cognitive Style

The Maximands of Corporate Governance: A Theory of Values and Cognitive Style Amir N. Licht * ABSTRACT This paper considers the raison d’etre of corporations as it is reflected in the maximands of corporate governance. The debate over stockholders’ versus stakeholders’ interests as such maximands has been raging for decades. Advances in economic theory have not only failed to resolve this debate but have established that the problem is graver than what many may have estimated. This paper turns this debate on its head: Instead of asking What or Whose interests should corporations maximize, the real question is Why is this debate taking place at all? Aiming to extend current economic analyses of the maximands issue, this paper puts forward a new theory about the factors that determine these maximands. Recent advances in psychological research point to value emphases at the individual and societal levels and to the need for cognitive closure as such factors. The theory proposes the notion of value complexity as an organizing element that may associate certain value emphases with cognitive style. Overall, this theory provides explanations for various sticky points in the stockholder-stakeholder debate in the United States and in international settings, identifies gaps in other theoretical accounts, and generates testable hypotheses for empirical research. Extant evidence supports this theory. This version: October 2004 JEL codes: K22, Z13 * Boalt Hall School of Law, University of California at Berkeley (visiting); Interdisciplinary Center Herzliya, Israel. alicht@idc.ac.il. For helpful comments I would like to thank Luca Enriques, Joe McCahery, Uriel Procaccia, Lilach Sagiv, Jordan Siegel, and Philip Tetlock.