Corporate Governance Welfarism

Abstract

Corporate governance is on the verge of entering a new stage. After the managerialism that dominated the view of the corporation into the 1970s and the shareholderism that supplanted it, we are witnessing the emergence of a new paradigm: corporate governance welfarism. Welfarism comes in three variants—portfolio welfarism, shareholder welfarism, and direct social welfarism—two of which are consistent with shareholder primacy. The distinction between welfarism and shareholderism, rather, is that welfarism embraces goals that are much broader than shareholder value as a means to promote overall welfare.

Welfarism, in turn, departs from managerialism in looking beyond the single firm, in relying on shareholder and stakeholder pressure rather than on managerial discretion to balance firm value maximization and broader objectives, and in embracing a wider set of potential stakeholders.
Welfarism is on the rise ideologically. While it is unclear how much welfarism has already affected operations at individual firms, there are good reasons to believe that the trends towards welfarism will take hold, grow, and, over time, generate a welfarist turn in corporate governance.

As welfarism succeeds in changing individual firm actions, it will run into two barriers. First because welfarism disproportionally affects public firms, this success will create profit opportunities for private firms that will limit its overall economic impact. Second, because welfarism enjoys only limited political support, it will encounter political opposition. We are therefore skeptical whether welfarism will succeed in its goal of transforming the economy. But we are more optimistic than those who would argue that welfarism is a dangerous placebo that diverts energy from pursuing more effective political change. Rather, we see the promise of welfarism as playing out in the political realm, by potentially changing the political economy of social regulation and thereby facilitating needed regulatory change. While welfarism looks to the corporate sector to substitute for the regulation of externalities blocked by political dysfunction, it may ultimately have a greater impact on improving our politics than on changing private enterprise.