7 - The Pure Economic Model of corporate governance: an analysis

Summary

‘What gives the right to direct a business corporation?’ If this question were posed to academic specialists, business people, and policy makers, nine out of ten would probably answer: ‘The pursuit of economic efficiency.’ After all, the objective of a business corporation is the creation of wealth. The existence of the corporation as a form of governance is justified by the corporation's ability to optimize the use of the resources at its disposal and, ultimately, to maximize profits. If every corporation optimizes its use of resources, the argument goes, society as a whole obtains the maximum benefits as a result. Therefore, it is the pursuit of economic efficiency that provides a strong basis for the presumption of legitimacy for the direction of the corporation.

The line of reasoning we have traced is so widely accepted that it is only rarely spelled out. The shared belief that individual economic successes enhance collective social justice is a major conceptual building block of modern Western society and has permeated liberal thinking for the better part of the last two centuries. At the heart of this shared belief stands the process of entrepreneurial direction. As discussed in Chapter 1, when we refer to the process of entrepreneurial direction, we mean the process whereby utility maximizing entrepreneurs direct their businesses to maximize their own wealth, and, in so doing, contribute to maximizing the wealth of society as a whole. The private action of entrepreneurs leads to a socially desirable outcome.