A Smithian theory of governance - Adam Smith on corporations and governance

With his Wealth of Nations, Adam Smith lays the cornerstone of modern economics. Although he advocates a system of natural liberty, where business actors should be left free to pursue their own interests, he also believes that granting economic liberties will become fruitful only when they are backed by individual morality and a system of governmental oversight that prevents the possible misuse of such liberties. Thus, Smith is more concerned about the moral preconditions of commerce and the question of how business affects the morality of a society. Nevertheless, his writings may also provide seminal insights for governance problems of contemporary corporations. As we will show in this chapter, ‘good governance’ for Smith is less a question of institutional arrangements, but of individual virtues. Even if such virtuous behavior follows not from the benevolence and the compassion of the manager with his business partners, it is, as Smith believes, a commandment of prudence in the business world.