Corporate Governance versus Real Governance∗

The rough coincidence of the 50th anniversary of Milton Friedman's Sunday New York Times Magazine article, “The Social Responsibility of Business Is to Increase Its Profits,” with today's movement advocating broader corporate purpose than maximizing shareholder value and stressing the public corporation's obligation to other stakeholders raises the questions: to whom is the corporation accountable and for what? This essay broadly distinguishes different governance structures that oversee the corporation's allocation and distributive decisions: on the one hand, how it goes about allocating investor capital and creating value; and on the other, whether it chooses to distribute the value it creates to stakeholders in ways that differ from the outcomes that would result from the labor and other various factor markets through which stakeholders provide their contributions. This distinction serves to underscore the difference between corporate governance, which effectively allocates accountability for the profitability of the corporation's business to the market, and real governance, which vests accountability for distributive decisions ultimately in elected officials.

The author posts a warning against those who view today's purpose-driven governance movement as a call for a shift back to a system of management and corporate governance that Alfred Chandler, in his iconic history of the development of the structure of large U.S. corporations, labeled “managerial capitalism.” Such a solution, as Chandler's chronicles should warn us, are likely to leave us confronting the same problem with which his managerial capitalism left us: the replacement of the invisible hand of markets with the visible hand of a management hierarchy. And this in turn forces us back to the hard question: what systems hold Chandler's management hierarchy accountable for its performance? The author argues that corporate governance and markets should continue to hold management accountable for creating efficiency and value, and that real governance, and ultimately the electorate, continue to be responsible—and if anything, assume greater responsibility—for “redistributive” decisions that override factor market allocations.