Chapter 4: Corporate Governance – Getting Back to Market Basics
Henry G. Manne INTRODUCTION 1. The subject of the governance of corporations with some non-controlling shareholders has come to the fore both politically and academically in recent years. These firms may be diffused-ownership, as characterizes many larger US companies, or they may be companies with a single controlling block of shares, whether owned or voted by individuals or intermediaries, as has largely characterized companies in Europe and most of the rest of the world. In either case, the fundamental problem of governance is always seen as how to protect the interests of the noncontrolling shareholders (and in some cases stakeholders) from financial depredation by the controlling shareholders or the managers of the firm. Anyone reading this chapter will immediately recognize this as the famous ‘agency cost’ problem identified nearly forty years ago by Michael Jensen and William Meckling,1 though their immediate interest was less in the abusive behavior of controlling shareholders than it was with managers themselves. For our purposes right now, however, we may simply assume a concurrence of interests between those two, a condition we will relax as the story unfolds. This conflict, or perhaps better, tension of interests was first noted without any supporting economic theory by Berle and Means in their classic The Modern Corporation and Private Property in 1933.2 There the problem was seen largely as one of diffused shareholders being unable to coordinate their monitoring efforts effectively to prevent managers from 1 Jensen, M.C. and Meckling, W.H. (1976), ‘Theory of the Firm: Managerial...
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