Elements of a theory of the responsible firm

Reflections on the second lecture of the Sir Oliver Hart Lecture Series, delivered by Professor Patrick Bolton at the London School of Economics (LSE) on 21 November 2024.

The second Oliver Hart Lecture, delivered by Professor Patrick Bolton at the London School of Economics (LSE), and titled “elements of a theory of the responsible firm”, explores what it means for firms to operate responsibly in our new world facing twin climate and nature crises. Professor Bolton's thought-provoking talk highlighted that the notion of responsibility is absent from the mainstream economic theories of the firm, but that putting responsibility at the centre of business is essential in the Anthropocene, if business is ever going to address the existential threat of climate change.

Introduction and Background

The evening began with an introduction by Professor Martin Oehmke of the LSE, who emphasized the importance of the Oliver Hart Lecture Series, inaugurated in 2023. This lecture series celebrates Hart’s influential contributions to economic theory, especially the theory of the firm and more generally contract theory. 

Revisiting the Theory of the Firm

Bolton began by revisiting the traditional economic theories of the firm, which he provocatively labelled as situated in the “Garden of Eden.” These foundational theories were largely conceived of in a world that did not yet face an urgent climate crisis. Bolton highlighted that a fundamental idea in all existing theories of the firm is that firms exist because markets are inefficient. Which raises the question of the purpose of the firm: is it to always and only pursue higher profits? Is this necessarily good for society, given that firms operate in a market environment that is fundamentally inefficient? 

Introducing the Responsible Firm

Against this theoretical backdrop, Bolton introduced his central argument: the necessity of developing a theory of the responsible firm in the Anthropocene, where firms more than ever before operate in a world fraught with environmental degradation and climate change. To illustrate, he invoked a satirical New Yorker cartoon that captured the crux of the problem: “Yes, the planet got destroyed, but for a beautiful moment in time, we created a lot of value for shareholders.”

Bolton credited Luigi Zingales and Oliver Hart’s influential paper, "Companies Should Maximize Shareholder Welfare Not Market Value," as an important precursor. Their argument—that firms should address environmental and social impacts when governments fail to regulate effectively—marked a paradigm shift in economic thinking about the shareholder value model in corporate governance.

To advance his argument, Bolton revisited the largely overlooked (by economists) 1916 Journal of Political economy article of Maurice Clark, at the time professor of economics at the University of Chicago, "The Changing Basis of Economic Responsibility." Clark framed the question of economic responsibility as follows, by asking: “Is there a twilight zone of obligations not yet enforced by law or custom but no less real for that? If there is such a twilight zone, how shall we act toward it?” 

Operationalizing Responsibility

Bolton’s lecture moved from principles to practical implications. He argued that responsibility is not reducible to preferences or stakeholder management alone. Instead, true responsibility requires awareness of the broader social context, adherence to ethical principles, and authenticity in corporate culture. Responsibility cannot be merely an add-on for branding or reputation management—it must be deeply embedded within an organization’s decision-making processes.

To operationalize this vision, Bolton suggested that firms must take proactive measures to mitigate their negative impacts. He cited examples such as reducing methane emissions in oil extraction—a technology that exists but is often underutilized due to cost considerations. He also addressed the broader systemic challenges of aligning corporate behaviour with societal well-being, highlighting the role of coalitions such as the UN Global Compact and Climate Action 100+ in fostering collective action.

Investor Responsibility and Legal Reform

Turning to the role of investors, Bolton invoked Clark’s critique of diversification as a mechanism that diminishes social engagement. Modern investors, often shielded by limited liability, lack the incentives to address the broader impacts of their portfolio companies. Bolton called for a re-evaluation of limited liability, referencing recent legal developments in Brazil and India that hold firms accountable for environmental and social harm.

He also highlighted Charles Goodhart’s proposal for distinguishing between retail investors, who might retain limited liability protection, and institutional investors or controlling shareholders, who could face unlimited liability to align their incentives with responsible corporate behaviour.

In his closing remarks, Bolton emphasized the urgency of integrating economic responsibility into mainstream theory and practice. He rejected the notion that economic life can be separated from broader social and political contexts, arguing that time is running out to address the mounting climate crisis. Echoing Morris Clark, he urged firms to act not merely within the law but with an awareness of their moral and social obligations.

The lecture concluded with a robust Q&A session, during which Bolton fielded questions on the practicality of his proposals, the balance between regulation and corporate responsibility, and the role of cultural change in fostering responsible behaviour. The discussion underlined the complexity of these issues while affirming the necessity of rethinking the role of firms in society. Professor Bolton’s lecture was a clarion call for a new economic ethos—one that places responsibility at the heart of corporate purpose. 

| Watch the lecture here. 

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