Corporations and mutual funds should ask shareholders and investors for their opinions on key management decisions, said Oliver Hart, a British-born economist at Harvard University and 2016 Nobel Prize winner in economics.

“Just as politicians go through a referendum to get the public to decide on a strategic issue, companies should ask shareholders for the big strategic choices that they make,” Hart said during a session titled “Should Companies Maximize Shareholder Value?” at the 18th World Knowledge Forum in Seoul hosted by the Maekyung Media Group.

Companies dealing with environmental and moral issues, such as carbon emissions and weapons production, should ask their shareholders what they would like to do rather than assuming that they only pursue profit maximization, he said.

“Managers have a fiduciary duty to shareholders but it is wrong to assume that they should be making as much money as possible for shareholders because that’s what they want,” he said. “Duty of loyalty means figuring out what the shareholders actually want and this may be something that is less profitable but socially better.”

Regarding mutual funds, Hart said that companies can arise with a platform that they are going to vote on issues in certain ways. For example, funds could draw investors by revealing upfront that they would vote against any sale of assault weapons to ordinary citizens.

“Founders can choose future actions through the corporate charter but we don’t see this much in practice because the future is too uncertain, which is why we don’t have these corporate charters in the form of complete contracts,” said Hart. He connected this to his theory of “incomplete contract,” explaining that companies tend to rely on the market for corporate control to determine their future destiny.

Hart is an expert on contract theory, theory of the firm, corporate finance, and law and economics. His research centers on the roles that ownership structure and contractual arrangements play in the governance and boundaries of corporations. He received the Nobel Memorial Prize in Economic Sciences in 2016 together with Bengt R. Holmstrom, professor of economics at the Massachusetts Institute of Technology.

The WKF, an annual forum hosted by South Korea’s largest business media Maekyung Media Group, is held until Oct. 19.

By Chun Jung-hong, Lee Yu-sup and Kim Hyo-jin

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