The John M. Olin Center

Paper Abstract

488. Mark J. Roe, The Institutions of Corporate Governance, 08/2004; subsequently published in Handbook of New Institutional Economics (Claude Menard & Mary M. Shirley, eds.), Netherlands: Springer, 2005.

Abstract: In this review piece, I outline the institutions of corporate governance decision-making in the large public firm in the wealthy West. By corporate governance, I mean the relationships at the top of the firm—the board of directors, the senior managers, and the stockholders. By institutions I mean those repeated mechanisms that allocate authority among the three and that affect, modulate and control the decisions made at the top of the firm.

Core corporate governance institutions respond to two distinct problems, one of vertical governance (between distant shareholders and managers) and another of horizontal governance (between a close, controlling shareholder and distant shareholders). Some institutions deal well with vertical corporate governance but do less well with horizontal governance. The institutions inter-act as complements and substitutes, and many can be seen as developing out of a “primitive” of contract law.

In Part I, I sort out the central problems of corporate governance. In Part II, I catalog the basic institutions of corporate governance, from markets to organization to contract. In part III, I consider contract law as corporate law’s “primitive” building block. In Part IV, I briefly examine issues of corporate legitimacy that affect corporate governance by widening or narrowing the tools available. The interaction between political institutions and corporate governance institutions is an inquiry still in its infancy but promises large returns. In Part V, I re-examine corporate governance in terms of economies of scale, contract, markets, and property rights. Then I summarize and conclude.

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