As discussed before, the separation of ownership and control of the firm gave rise to difficulties monitoring managers (Berle and Means 1932). In the modern corporation, the owner is not a single individual, but rather thousands. With such dispersion of ownership, the owners may have little influence over the managers who run the firm. Furthermore, it is possible for managers to have different priorities than the owners.
The managerial theories discussed that the managers may pursue power, prestige, and personal gratification over profit maximization. In addition, manager’s jobs are tied to the firm, but owners have the opportunity to diversify. This too creates different orientations between owners and managers. Managers may have a more short-term and risk-adverse focus.
Agency theory views the firm as a nexus of contracts. It discusses the principal-agent problem (here, principals are the owners and agents are the managers). It also discusses potential solutions to this problem including incentive contracts to align managers and owners interests.
Corporate Governance is also concerned with the Board of Directors. This group of people traditionally serve as the representatives of shareholders. In this role, they monitor the actions of the firm to ensure that decisions work toward the interests of owners, they set compensation for the top management, they can hire or fire CEO, and approve most major organizational decisions.
The Board of Directors research is concerned with various aspects of the board, including:
- Board composition: Insiders, outsiders, affiliated (representatives of other firms that do substantial business with the firm), family directors.
- Board Structure: Independence of the board typically evaluated by CEO duality (Chair of Board and CEO the same), insiders (employees of firms, beholden to CEO) vs. outsiders, committees.
- The Role of Committees: Audit committees – Role of outside auditor, financial malfeasance, Nominating committees, Compensation committees.
- Board interlocks: Connections, resources, and information flow across organizations through board members. Can help the acquisition of financing, supplies, customers, collusion.
- Board Characteristics:
- Demographics and background of board members: extent of similarity in age, tenure, industry experience and other characteristics.
- Elites: board members social clubs, education, charity activities
Research in the ownership of firms looks at who the shareholders are and what role they play:
- Institutional (block) ownership: Large ownership positions held by institutions, especially pension funds and mutual funds. Larger owners ostensibly may monitor more (goes against disperse ownership model of Berle and Means), but may also be indexing and less likely to follow specific actions of top managers.
- ‘Activist’ owners: Role of VCs, angel investors, corporate venture capital, private equity, investment banks.
- Outside vs. inside owners.
- Board and top manager ownership.
- Privately-held firms and family firms.
Corporate control has also been an area of research. This typically look at:
- Takeover market – Ultimate market mechanism to remove inept managers. Corporate raiders and leveraged buy-outs of the 1980s. Private equity today.
- Financial analysts predict earnings and recommend stock purchases .
- The investment bank that is chosen for corporate equity/debt underwriting.
The environment plays an important role. In particular, the Sarbanes Oxley Act which requires that CEOs and CFOs personally certify financial statements. There is also the NYSE requirement that firms have nominating, audit and compensation committees made up of non-executive directors.