Corporate governance is a recent concept that encompasses the costs caused by managerial misbehavior. It is concerned with how organizations in general, and corporations in particular, produce value and how that value is distributed among the members of the corporation, its stakeholders. The interrelation of value production and value distribution links the ubiquitous technological aspect (the production of value) with the moral and ethical dimension (the distribution of value). Corporate governance is concerned with this link in general, but more specifically with the moral and ethical dimensions of distributing the generated value among the stakeholders. Value in firms is created by firm-specific investments, and the motivation and coordination of value-enhancing activities and investment is protected by the power concentrated at the pyramidal top of the organization. In modern companies, it is the CEO and the top management who decide how to create value and how to distribute it among the relevant stakeholders. Due to asymmetric information and the imperfect nature of markets and contracts, adverse selection and moral hazard problems occur, where delegated (selected) managers could act in their own interest at the costs of other relevant stakeholders. Corporate governance can be understood as a two-tailed concept. The first aspect is about identifying the (most) relevant stakeholder(s), separating theory and practice into two different and conflicting streams: the stakeholder value approach and the shareholder value approach. The second aspect of the concept is about providing and analyzing different mechanisms, reducing the costs induced by moral hazard and adverse selection effects, and balancing out the motivation and coordination problems of the relevant stakeholders. Corporate governance is an interdisciplinary concept encompassing academic fields such as finance, economics, accounting, law, taxation, and psychology, among others. As countries differ according to their institutions (i.e., legal and political systems, norms, and rules), firms differ according to their size, age, dominant shareholders, or industries. Thus, concepts in corporate governance differ along these dimensions as well. And while the underlying characteristics vary in time, continuously or as a result of an exogenous shock, concepts in corporate governance are dynamic and static, offering a challenging field of interest for academics, policymakers, and firm managers.
Erik E. Lehmann
With shareholder supremacy, the board is accountable to all shareholders, including minorities, enforced by restrictions on managerial opportunism. The market for corporate control and scrutiny of diversified institutional investors provide the mechanisms for disciplining managers to act in shareholders’ interests. Along with legal protections for minorities, these mechanisms ensure the supremacy of shareholders as a stakeholder group. Shareholder value maximization, as a theory and a set of financial techniques, provides quantitative outputs that drive managerial behavior. From a historical perspective, shareholder supremacy is a late twentieth-century phenomenon according to these definitional characteristics. History also reveals that shareholders have exercised dominance in other ways and that their power as a stakeholder group has waxed and waned over time as the governance role of investors has changed. Shareholder supremacy can be asserted in a number of ways. Shareholder activism and transparent structures of accountability are sufficient conditions in some circumstances. The suitability of this model is dependent on market structure and favored where there are local monopolies or businesses that have a narrow scope of activities. Alternatively, shareholders as active institutional investors can play a dominant role utilizing the market for corporate control. Collaboration with board insiders committed to expansion by takeover and merger is crucial to the success of this model. Finally, and most recently, the complementary presence of the market for corporate control, diversified institutional investors, and minority protection underpins present-day shareholder supremacy. In this model, the use of a common valuation technique is crucial. History reveals differing routes to shareholder supremacy, which have followed from developments in the institutional structure of regulation and changes in shareholding patterns.