"Shareholders should be given the power to hold management accountable."
Sep 2026
Backbone of the economy
The British-American economist and Nobel Prize winner Oliver Hart wants to democratize the financial system and has developed an alternative. It could change the basic rules of capitalism.
This interview by Peter A. Fischer and Thomas Fuster was originally published in NZZ on 6.8.2026 in German. Translated and edited for context purposes by the UBS Center.
Contracts are the backbone of the economy. Ideally, they ensure reliability and facilitate social interaction. Nevertheless, contracts have long only played a minor role in economics. Oliver Hart changed that—and was awarded the Nobel Prize in Economics for his work in 2016.
Born in London in 1948, Hart has been conducting research at Harvard University since 1993 and has since become a U.S. citizen. Among other things, he explores why a perfect contract cannot exist, what that means for people, and how they can deal with this problem.
One particular type of contract is that between companies and their owners: the shareholders. According to Hart, this system needs to be corrected. This is because shareholders struggle to have their voices heard. He explains how this could be changed in an interview that took place on the sidelines of an event hosted by the UBS Center for Economics in Society in Zurich.
Mr. Hart, lawyers tend to make contracts increasingly detailed. Yet you received the Nobel Prize for your research on incomplete contracts. What is behind this concept?
The basic idea concerns long-term business relationships in an uncertain world. An ideal, complete contract would have to anticipate every conceivable future development. For example, if you provide me with a service, your costs could rise unexpectedly, or my needs could change. Lawyers would love to use a complete contract to specify exactly who has to do what and how much must be paid in each of these situations. The parties would then never have to meet again to make adjustments; a glance at the contract would suffice.
That seems rather unrealistic.
Exactly—in reality, that’s usually impossible. It requires too much mental effort, imagination, and writing. Since we can’t foresee everything, contracts are usually incomplete. Circumstances will inevitably arise in which adjustments are absolutely necessary, but the contract provides no answer as to what should be done.
In construction projects, the lowest bid usually wins. Shortly after construction begins, however, construction companies often demand additional payments for services that the contract allegedly does not cover. How can this conflict be explained?
This is a classic scenario. The buyer argues that the fixed price agreed upon covers all risks and that the contract is therefore complete. The seller—that is, the construction company—counters that this price applies only to standard circumstances, but not to additional requirements or the geological and logistical problems that allegedly arose. This leads to a dispute.
You once mentioned that you and your assistants typically agree on employment with just a handshake, but that you drew up a detailed contract for your home renovation.
When I hire an assistant at Harvard University, what I consider essential in the case of imperfect contracts comes into play: there are unwritten norms regarding what constitutes fair conduct. The university and its professors have a reputation to uphold. I don’t need to spell that out in detail. When I renovated my house, it was different.
Tell us about it.
I wanted to expand my house, and the new roof was supposed to match the old one visually. But in the middle of the construction phase, it turned out that the old material was no longer being manufactured. To maintain a consistent style, the old roof now had to be replaced as well, which resulted in significant additional costs. Who should bear the costs? Arguments could be made both ways. It was a large sum, but it was also clear that we wouldn’t be entering into another contract with each other in the future.
Who ended up winning?
In the end, I came up short because the balance of power was uneven. Every time I questioned something, the contractor reacted indignantly and implied, “Are you calling me a liar?” I couldn’t handle that; he held all the cards, and I had to bear the full cost.
What practical recommendations do you derive from this? How can we improve the drafting of incomplete contracts?
I recommend relying on what I call a “relational contract.” Instead of trying to secure contracts with countless, often incomprehensible clauses, the parties should supplement the contract with an agreement on shared guiding principles.
In hindsight, what should you have agreed upon with your contractor?
To be honest, I don’t know if he would have gone along with it, but we could have tried: We would have both formally acknowledged that the contract is incomplete and that unforeseen events such as pandemics, wars, or even material shortages could occur. We would state that we would be guided by the principles of equality, loyalty, honesty, integrity, autonomy, and reciprocity in these situations. Beforehand, we would discuss what these principles mean. This builds a genuine relationship. In the case of my roof problem, a fair approach would likely have resulted in splitting the unexpected additional costs 50-50, rather than leaving one party feeling aggrieved.
Why should a company seeking to maximize its profits have an interest in equality and loyalty?
Because a sustainably successful business relies on satisfied customers who recommend the company to others. Incomplete contracts require a relationship-based model. This also protects the seller, since buyers, too, can behave opportunistically, delay payments for no reason, or make unjustified claims. Transaction and conflict costs decrease when both parties want to ensure that the other feels treated fairly.
Your approach is based on the assumption that the classic “homo economicus”—the self-interested utility-maximizer—does not actually exist in reality.
Absolutely. There is overwhelming empirical evidence to support this. People have social preferences. When I speak with people in the business world, they tell me about the massive uncertainty they face and the paramount importance of functioning business relationships. Once you acknowledge that relationships matter, you admit that people are willing to look beyond the narrow focus of short-term profit maximization.
This runs counter to Milton Friedman’s assertion that companies should focus exclusively on maximizing profits for their shareholders. After all, shareholders can always donate their money to social causes. You consider this narrative to be fundamentally flawed. Why?
Friedman’s logic fails when externalities such as environmental pollution come into play. Let’s look at a numerical example: A company can generate an additional profit of $10 million by polluting the environment, but in doing so causes a total social cost of $12 million. According to Friedman’s logic, shareholders should vote in favor of this profit, pocket the money, and then privately donate it to environmental protection. But that is inefficient.
Because it costs more?
First, it costs $2 million more. It is much cheaper to avoid pollution in the first place than to clean it up later at great expense. Second, retroactive, private cleanup by a scattered group of shareholders is virtually impossible to coordinate. If a shareholder with social preferences is allowed to decide, he or she will therefore reasonably vote against pollution—even if this reduces the financial return.
How do you know that shareholders on the stock market want to act morally and aren’t simply trying to maximize their retirement savings?
Shareholders don’t leave their humanity in the stock market’s garderobe. We can see this from concrete data. Here’s an example: In 2022, the development organization Oxfam submitted shareholder resolutions to Pfizer and Moderna demanding that they share the patents for COVID-19 vaccines with African countries in order to offer the vaccines there at cost. The large institutional asset managers voted unanimously against them, yet the resolutions received 20 to 30 percent support—driven by small shareholders. These people were willing to forgo maximum dividends to save lives. And when a Dutch pension fund asked its members whether it should invest more or less of their funds in impact investing—even if this slightly reduced returns—a clear majority favored a strategy with more impact investing.
Most people today invest through ETFs and index funds. Voting rights then lie with intermediaries, who almost always vote with the goal of maximizing profits. How can you find these investors’ true preferences?
The current system of proxy advisors and large funds does not reflect the owners’ interests because asset managers misinterpret profit maximization as a fiduciary duty and don’t even ask their clients in the first place. I think they should try to find their clients’ interests.
How can this be done?
Since it’s impossible for retail investors to monitor all shareholder votes for thousands of companies in an index fund, my fellow researchers Luigi Zingales, Helene Landemore, and I propose what we call “investor assemblies.” A fund like Vanguard would randomly select a representative group of about 150 investors and compensate them financially for their time.
And what would these investors do?
They would meet in person or online, receive independent information from experts on both sides—for example, about the pros and cons of patent waivers or climate measures—and then debate the strategic guidelines for the fund’s voting behavior. Investor assemblies are applied democracy at the financial market level. Pension funds have already successfully tested this model in practice in the Netherlands and the United Kingdom.
Are 150 investors enough to make such far-reaching decisions?
If they are selected properly, representative decisions will result. But all shareholders could then vote on these recommendations, as was done with the Dutch pension fund.
Why would large funds or pension funds do something like this? After all, it means additional costs and bureaucracy for them.
Large asset managers like BlackRock or Vanguard are criticized for concentrating too much power by voting on key issues at their own discretion on behalf of their investors. As a result, they face political pressure.
Ultimately, do you want to attract more people to impact investing—that is, investments that generate a positive social impact in addition to financial returns?
We’re not against impact investing, but our approach differs fundamentally from a traditional divestment strategy, where “bad” stocks are sold for moral reasons. On the contrary, we say: Invest in everything! We’re fans of broadly diversified index funds. The key difference is this: when you own shares in all companies through such funds, you also have voting rights everywhere. And you can use those voting rights to steer corporations in a positive direction.
When investors are dissatisfied with a company, they sell their shares.
Selling a stock generally does not change a company’s behavior. If you sell your shares for moral reasons, another investor who is less scrupulous will buy them. The company will continue as before, while you’ll end up with a poorly diversified portfolio and, consequently, a higher financial risk.
And what’s the alternative?
Hold onto the stock, retain your voting rights, and use collective mechanisms like shareholder meetings to force management to behave better.
In many cases, that’s likely to be difficult. Tech conglomerates and companies like SpaceX wield enormous economic power. Does that worry you?
Yes, of course. Where a great deal of power is concentrated in the hands of a few companies, there’s always the danger that they’ll abuse it to influence policy in their favor. That’s dangerous. My proposal can’t solve everything, but if these companies are large publicly traded corporations, my shareholder meetings would hopefully deter management from exerting undue political influence.
But the big new tech companies aren’t ordinary publicly traded companies. Founders like Elon Musk have secured an absolute majority of votes through dual-class stock structures, even though they are only minority shareholders. Isn’t shareholder democracy powerless in such cases?
Where a dominant founder controls the absolute majority of votes, shareholder democracy reaches its limits. But I have no problem with that. I don’t want to dictate to companies what kind of corporate governance they should adopt. It’s also fine if a company stipulates in its bylaws that its sole objective is to maximize shareholder value.
Does this mean that you are not an advocate of stakeholder capitalism?
No, my point is this: Most companies are organized in such a way that they give shareholders a significant voice. And those voices should also be heard in these traditional publicly traded companies. The principle of “one share, one vote” applies. Shareholders should have the power, through their funds, to hold management accountable or to remove board members if they act against the company’s interests.
Should the government intervene and ban unequal voting structures?
I’m torn. On the one hand, I value freedom of contract: If someone starts a company and investors knowingly purchase non-voting shares, that’s a legitimate contractual agreement. However, this concentration of power poses risks to society. Colleagues at Harvard Law School have proposed statutory time limits—so-called “sunset clauses”—as a regulatory compromise: After five or ten years, these preferred shares—like those that Meta or Alphabet hold—should automatically expire to restore democratic control.
A recurring topic at annual shareholder meetings is high executive salaries and bonuses, even in the face of staggering losses. Why have shareholders so far been largely unable to stop such excesses?
To be honest, as a shareholder, I’m not particularly interested in this discussion about executive compensation. But I think the system overwhelms individual shareholders. I once tried to manually exercise my voting rights for my private funds. I received several notifications a day about annual shareholder meetings and was soon completely overwhelmed by the flood of information. But there are ways around this.
What are they?
There are tools available, such as Iconik, an app that automates voting based on a personal value profile. However, when it came to Elon Musk’s massive compensation package at Tesla, I had to intervene manually because the algorithm wanted to vote in favor of it, even though I was against it. This was because I had never indicated that I believed in salary caps. If index funds were given clear guidelines against excessive compensation through representative investor meetings, they would certainly change their voting behavior.
In Switzerland, greater transparency and a say in executive compensation were primarily enforced through popular initiatives—that is, through the political process of direct democracy. How do you assess this state-led approach?
That is absolutely legitimate. From an economic perspective, I would find it more elegant if asset managers and corporations were to introduce democratic participation models voluntarily and spontaneously—whether as a marketing tool or out of fear of political dismantling. But if social pressure becomes so great that change is enforced through legislation, I won’t be breaking down in tears over it.
The British-American economist and Nobel Prize winner Oliver Hart wants to democratize the financial system and has developed an alternative. It could change the basic rules of capitalism.
This interview by Peter A. Fischer and Thomas Fuster was originally published in NZZ on 6.8.2026 in German. Translated and edited for context purposes by the UBS Center.
Contracts are the backbone of the economy. Ideally, they ensure reliability and facilitate social interaction. Nevertheless, contracts have long only played a minor role in economics. Oliver Hart changed that—and was awarded the Nobel Prize in Economics for his work in 2016.
Oliver Hart, a British national born in 1948, was awarded the Nobel Prize in Economics in 2016 for his work on contract theory. He recommends that developers supplement their contracts with an agreement on shared guiding principles.
Opinion keynote
In honor of Ernst Fehr
Ernst Fehr has always seen what others missed – the connections between disciplines, the institutions that research needs to thrive, and the partnerships that make lasting impact possible. As he celebrates his 70th birthday, the UBS Center takes this as an opportunity to highlight a career that has shaped behavioral economics as a field, and Zurich’s Department of Economics as a world-class institution. Explore a selection of work, conversations, and tributes that reflect the breadth of his contribution.
Ernst Fehr has always seen what others missed – the connections between disciplines, the institutions that research needs to thrive, and the partnerships that make lasting impact possible. As he celebrates his 70th birthday, the UBS Center takes this as an opportunity to highlight a career that has shaped behavioral economics as a field, and Zurich’s Department of Economics as a world-class institution. Explore a selection of work, conversations, and tributes that reflect the breadth of his contribution.
Speaker
Nobel Laureate, Andrew E. Furer Professor of Economics, Harvard University
Prof. Oliver Hart
Sir Oliver Hart is Professor of Economics at Harvard University and one of the world’s most influential economic theorists. He was awarded the Nobel Prize in Economic Sciences for his pioneering contributions to contract theory, which transformed how economists understand the design of institutions, organizations, and corporate governance. His work has shaped research across economics, law, and finance, and has influenced debates on privatization, public-private partnerships, and the governance of firms. In recent years, Hart has turned his attention to a new question: what role investors themselves should play in shaping how corporations respond to today’s major societal challenges.
Nobel Laureate, Andrew E. Furer Professor of Economics, Harvard University
Prof. Oliver Hart
Sir Oliver Hart is Professor of Economics at Harvard University and one of the world’s most influential economic theorists. He was awarded the Nobel Prize in Economic Sciences for his pioneering contributions to contract theory, which transformed how economists understand the design of institutions, organizations, and corporate governance. His work has shaped research across economics, law, and finance, and has influenced debates on privatization, public-private partnerships, and the governance of firms. In recent years, Hart has turned his attention to a new question: what role investors themselves should play in shaping how corporations respond to today’s major societal challenges.