The common view of the public corporation is that of an organization run by top managers, and monitored by a board of directors on behalf of public shareholders. The separation of decision management (the CEO) from decision control (the board) and from risk-bearing constituents (public shareholders) is thought of as a reasonable way to structure firms, and so long as decisions are made in the interests of the shareholders, efficiency is maximized.
Yet the clear evidence that the public corporation is an organizational structure with survival value has to be set against the equally clear evidence, shown by various researchers over the past few decades, that most shareholders have little control over boards, that many boards are poorly informed and have little ability to scrutinize top management’s decisions, and that some CEOs are self-interested rather than working for shareholders. Admittedly, the market for corporate control can offer some discipline, but it is hard to see it as effective in controlling operational decisions. How then do we reconcile the survival, and hence presumed efficiency, of the public corporation with the ineffectiveness of the supposed channels through which it is governed?
We argue that there are important stakeholders in the firm, such as critical employees, who care about its future even if the CEO has short horizons and is self-interested and shareholders are dispersed and powerless. These stakeholders, because of their power to withdraw their contributions to the firm, can force a self-interested, myopic CEO to act in a more public-spirited and far-sighted way. We call this process internal governance.
Authors: Raghuram G. Rajan, Stewart C. Myers, Viral V. Acharya
Source: NYU Stern School of Business
Subject: Corporate Governance
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