Monday, April 03, 2006

Defining the scope of corporate governance

Schleifer and Vishny in their 1995 paper have given a definition of corporate governance that has since been widely quoted and referenced:

Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or divert it to other uses? How do suppliers of finance control managers?

Others have identified two main aims of corporate governance:
1) The corporate contract between managers and shareholders is an incomplete contract.
Corporate law provides a set of standard terms that permit participants in the contract to enter into an agreement by economizing on contracting costs.
Corporate governance is a way to ensure that the gaps are filled.

2) The aims of managers and shareholders are not the same, i.e. there exists an agency problem.
Corporate governance exists to make sure managers do not shirk. The separation of ownership and control necessitates mechanisms that align incentives and corporate governance is one of these mechanisms.

No comments: