Harmonious Corporate Governance

Corporate governance matters because how well corporations utilize the people's savings matters. Many developed economies mandate that corporations be run for their public shareholders. This is not because shareholders are superior to employees, bankers, bondholders, customers, suppliers, or anyone else. Rather, it is because poor governance usually harms public shareholders before it harms others. Well engineered disclosure rules make corporations transparent, so poor governance quickly depresses share prices, alarming shareholders who demand corrective measures. Ideally, all this happens before the problem grows large enough to harm employees, customers, or other stakeholders. Governing corporations for shareholders really amounts to 'using' shareholders as early warning alarms and automatic correction mechanisms. But sound government policies are necessary, for this works if corporations are rendered transparent and public shareholders are empowered to force changes. Other stakeholders cannot fulfill this role as well because shareholders' wealth is most directly tied to the firm's economic efficiency.