Corporate Governance versus Real Governance

Abstract

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 Profit” – and a movement advocating that corporations should have a broader purpose than maximizing shareholder value headlined by the British Academy’s project on the Future of the Corporation and especially the corporation’s obligation to other stakeholders, raises questions concerning to whom the corporation is accountable and for what. This essay broadly distinguishes between the corporation’s allocation and distributive decisions: on the one hand, how it goes about creating value; and on the other, whether it chooses to allocate the value created in a fashion different than would result from factor market outcomes. This distinction roughly highlights the difference between corporate governance, which serves to allocate accountability for the profitability of the corporation’s business to the market, and real governance, which allocates accountability for distributive decisions ultimately to elected officials.

The essay then addresses the relative effectiveness of corporate and real governance and, in particular, in the context of whether corporate governance could be effective in responding to Facebook’s massive data breach in connection with Cambridge Analytica.

Keywords: Corporate Governance, Corporate Law, Corporate Purpose

JEL Classification: K22, G3, G18, G34, P12