Firms Behaving Nicely : Incentives and Commitment

Ever since the rise of large firms in the 18th century, debate has been raging about how to combine economic efficiency and productivity with socially desirable behavior of firms. This paper reviews the debate starting with the classic corporate go...

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Bibliographic Details
Main Author: Klein, Michael
Format: Working Paper
Language:English
en_US
Published: International Finance Corporation, Washington, DC 2014
Subjects:
BID
CEO
TAX
Online Access:http://documents.worldbank.org/curated/en/2013/09/19541781/firms-behaving-nicely-incentives-commitment
http://hdl.handle.net/10986/19037
Description
Summary:Ever since the rise of large firms in the 18th century, debate has been raging about how to combine economic efficiency and productivity with socially desirable behavior of firms. This paper reviews the debate starting with the classic corporate governance argument about shareholder rights. It discusses the potential incentives to exploit other stakeholders unduly and examines some mechanisms, beyond contracts and regulation, to cope with this exploitation. In this light it considers reputational mechanisms, using the example of corporate social responsibility, and changes to the constitution of firms, with emphasis on the nonprofit form of enterprise. Based on evidence so far, the for-profit firm with mechanisms assuring sound shareholder rights remains preferable to the alternatives. However, scope for experimentation with mechanisms such as different classes of shareholders with differing voting rights may be socially useful, which suggests that global corporate governance principles thus should not be prescriptive in detail.