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Corporate Governance: Does It Work?

Corporate Governance: Does It Work?. Economics 437. How are Public Companies Governed?. Board of Directors Hire Senior Management (in theory) Oversee Regulatory Filings (in theory) Supervise Firm Activity (in theory) Why Might There Be a Problem Absentee owners Principle/Agent problems

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Corporate Governance: Does It Work?

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  1. Corporate Governance: Does It Work? Economics 437

  2. How are Public Companies Governed? • Board of Directors • Hire Senior Management (in theory) • Oversee Regulatory Filings (in theory) • Supervise Firm Activity (in theory) • Why Might There Be a Problem • Absentee owners • Principle/Agent problems • Agent agendas

  3. Principal/Agent Problem • Shareholder is the principal • Management is the agent • Shareholders’ (economic) interests my be dramatically different that the (economic) interests of management • Acquisitions for “growth” or “diversification” • Executive compensation

  4. What things can improve corporate governance • The “reputation” theory • Legal requirement that management “act in the interests of shareholders” • Large shareholders • Large investors (LBOs) • Which of these work or don’t work

  5. Shleifer & Vishny conclude • Legal protections (fiduciary standards) help if enforced (US and UK) • Large shareholder (ala Germany & Japan) • LBOs help • But, outside of US, UK, Germany, and Japan shareholders protections are very, very inadequate

  6. End

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