As the economy lurched from the global financial crisis, to the period of prolonged stagnation and elevated unemployment that followed, to the suspension of economic activity in the COVID-19 crisis, and now to a period of dislocation and elevated inflation, the limits of traditional macroeconomic tools were revealed. Governments looked to existing fiscal and monetary policy tools for solutions to each challenge, but found that those tools were often unavailable or ineffective. A new wave of legal scholarship has sought to expand the toolkit by identifying ways that legal rules could be altered to induce businesses and individuals to increase investment and spending in times of economic trouble. But, with a few exceptions, relatively little has been done to use insights from the study of corporate governance to mobilize the capacity of corporations to move the economy out of a crisis.

A new paper forthcoming in the North Carolina Law Review seeks to explore this gap. The conceptual and practical tools the paper develops could have a substantial impact. Corporations command extraordinary financial resources and have enormous operational scope. And because corporations can act flexibly and with dispatch, they can readily respond to changing circumstances from high unemployment to high inflation. Harnessing corporate capacity would dramatically improve the economy’s ability to recover from a variety of serious economic crises.

Corporate governance is a natural starting point in the effort to harness the power of business. Traditional macroeconomic policy tools seek to encourage businesses to decide to invest and hire in recessions by changing the external environment in which they operate. But altering corporate governance arrangements — the incentives and mechanisms that drive corporate decisions — can operate more directly on corporate investment and hiring decisions.

Read more at Harvard Law School Forum on Corporate Governance