Government Failure and Corporate Reform

Corporate law has been racked by a decades-long debate. Shareholder primacy theorists suggest that corporate leaders should focus exclusively on maximizing financial returns to shareholders, while stakeholder governance theorists suggest that corporate leaders should consider a broader range of concerns such as impacts on workers and the environment. Though the battle has been fought intensely on many fronts for years, there is one area of apparent agreement. Most commentators view stakeholder governance as a kind of second-best regulation. Ideally, the government would tend to worker and environmental concerns through real regulations, imposing financial penalties on corporations that behave in socially destructive ways. Corporate leaders could then focus on financial returns, given the knowledge that bad behavior would not be profitable. It is only when the government fails in its basic task by refusing to issue or enforce necessary regulations that it becomes necessary for corporations to balance different concerns internally. But although it seems to be a point of broad agreement, the idea that stakeholder governance is a response to government failure is incomplete. This Article unpacks that claim and reveals its shortcomings. It is far from obvious whether the government’s refusal to regulate in a space is a failure or simply a result of the democratic process given widespread disagreement. And even an “ideal” government would face limitations in its ability to drive good outcomes. Statutes and regulations are inherently limited tools, and there are many areas such as speech and dignitary interests where the government cannot interfere or provide an adequate solution. Understanding these shortcomings deepens the analysis of the relationship between corporate governance and the political process and reveals fresh insights about the debate between shareholder primacy and stakeholder governance.