Research Handbooks in Law and Economics series
Edited by Claire A. Hill and Brett H. McDonnell
Chapter 19: The Influence of Investment Banks on Corporate Governance
Tamar Frankel This chapter analyses the influence of investment banks on corporate governance. In this chapter, ‘corporate governance’ or ‘governance’ generally means the part of the institutional structure that vests the power to control the operations and direction of a corporation. This part consists of the board of directors and top management. The first part of the chapter defines ‘corporate governance’ and ‘management’. The second part examines the role of finance in shaping corporate management and their strategies. The third part describes investment bankers and what investment bankers currently do. The fourth part examines the parallel rise of the importance of finance and the influence of investment bankers on corporate management. It evaluates the role that investment banks play in corporate governance and the benefits and disadvantages of such influence to the corporate enterprise and its investors. The fifth part concludes by comparing past and present practices. Like most cases, there is a slippery slope in which the good could turn into bad, and life-giving could turn toxic. Therefore, the more difficult question is when and how does the influence of investment bankers over corporate governance begin to turn from good to bad and what warning signals show that the beneficial influence of investment bankers on corporate governance turns or might turn sour. The answer to this question is related to the role that financing plays in management of large corporations. As the financing role rises, so does the influence of investment bankers. 1. CORPORATE GOVERNANCE: THE MANAGEMENT ‘Governance’ derives...
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