Countercyclical Corporate Governance

The American economy has lurched from crisis to crisis for over a decade, enduring long stretches of high unemployment, market dysfunction, and ineffective government policy. Despite the enormous scale of this suffering and disruption, the full implications of the experience have not been absorbed by the corporate governance literature. Corporate law’s focus on delivering financial returns to shareholders works reasonably well in a robust economy, when markets function effectively and align shareholder incentives with the goal of maximizing social wealth. But these tidy mechanisms fail in periods of macroeconomic stress, when markets send faulty signals and firms pursuing short-term shareholder profits can destroy social wealth. The layoffs or price increases often desired by shareholders can be useful in a healthy economic environment, as they cause resources to be allocated more efficiently to higher-value uses, and competitive markets prevent harm from falling on workers or consumers. But the same maneuvers can be destructive when the economy is afflicted by unemployment or inflation. Revising corporate governance arrangements so that companies focus less on maximizing short term shareholder profits during crises can thus be a useful tool for managing economic problems and improving outcomes.This Article begins the theoretical and practical work of adapting corporate governance to periods of economic crisis. After demonstrating that the assumptions that have driven corporate law debates depend on macroeconomic context, the Article shows that correcting those assumptions could make corporate governance a powerful tool for managing crises. These insights offer a useful framework for evaluating measures undertaken by businesses, investors, and the government in response to the COVID-19 crisis, while suggesting new avenues for action