The Corporate Governance Trilemma

49 Pages Posted: 20 Mar 2024 Last revised: 3 Apr 2024

Date Written: February 16, 2024


This Article argues that, if the transaction costs of coordinating joint ownership around social goods are sufficiently high, it is impossible to achieve all three of the following corporate governance features simultaneously: liquid share trading of ownership interests; low cost removal of directors by stockholders; and a credible commitment to producing a costly corporate social good.

The friction driving this corporate governance trilemma is the transaction costs that investors with pro-social preferences face when coordinating around nonfinancial objectives. The fundamental problem is that market-based corporate governance in pro-social corporations leads inexorably to mission drift: profit-motivated outsiders take control of the company and abandon costly production of social goods. Search costs, verification costs, and incomplete contracting costs make it costly for investors to identify and sell to other like-minded, pro-social stockholders in liquid trading markets. Instead, the rational strategy for each individual, non-pivotal pro-social stockholder is to economize on transaction costs by selling on-exchange to the highest bidder.

The punch for corporate governance theory and private ordering is that founders need to establish institutional mechanisms that protect corporate production of social goods from the start or risk losing the opportunity to produce them at all. The corporate governance trilemma points to two institutional solutions: a closely held corporation or a widely held corporation with restrictions on transfers of governance rights. These institutions require trade-offs compared to market-based corporate governance in the form of agency costs or illiquidity costs.

Thus, the transaction costs of co-ownership, and the institutional mechanisms that affect these costs, help explain not only the ownership structure of firms, but also costly corporate social responsibility.

Keywords: corporate governance, social enterprises, externalities, transaction costs, ESG, public benefit corporations

JEL Classification: G30, G34, D62

Suggested Citation

Corrigan, Patrick, The Corporate Governance Trilemma (February 16, 2024). Available at SSRN: or

Patrick Corrigan (Contact Author)

Notre Dame Law School ( email )

Eck Hall of Law
Notre Dame, IN 46556
United States

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