Corporate Purpose and Democratic Theory: A Governance Trilemma

Over the last years, both in the popular press, policy and business circles and in academia, people call for corporations to orient their behavior towards 'purpose'. This is meant as a move away from shareholder value maximization as the lodestar for corporate action. But purpose-advocates are torn between two directions in thinking about corporate governance: towards corporate governance on behalf of stakeholders by an independent board, and towards corporate governance by stakeholders through a responsive board. The paper's aim is to enlighten this choice by placing it in a trilemma with a third option: corporate governance on behalf of shareholders. This corporate governance trilemma shows us which trade-offs are at stake in making choices between the relevant values: the minimization of externalities, collective decision-making costs and agency costs. It discusses the various trade-offs in the trilemma. Finally, the paper argues that corporate purpose is best served by a balance between board independence and responsiveness.