Managers’ accountability to shareholders and corporations’ responsibility to society are two important objectives of corporate governance. Some scholars argue that managers who are accountable to shareholders must neglect society’s interest. But loosening this accountability leaves managers free to serve themselves, thereby increasing agency costs. This article makes three main contributions to the debate on the appropriate roles of accountability and responsibility. First, it shows how modern markets cause managers who are accountable to shareholders also to attend to society’s interests. Second, it shows that the debate is actually less important than it might first appear because the logistics of publicly held corporations substantially free managers from accountability to shareholders irrespective of whether society’s needs should compel that freedom. Third, the paper shows that the debate may be joined over whether partnership-type devices compelling distributions and allowing owner cash-out should be imported into publicly held firms. These devices would provide for more managerial accountability to shareholders, and therefore less flexibility to serve society’s interests, than standard corporate governance mechanisms. The main impediment to use of these devices is the double corporate tax, which provides tax benefits for earnings retention and thereby encourages managerial control over corporate earnings. The future of the corporate tax may depend at least in part on the debate over accountability and responsibility in corporate governance.


Law and Economics

Date of this Version

September 2005