The Institutions of Corporate Governance

Handbook of New Institutional Economics (Claude Ménard & Mary M. Shirley, eds.) (Kluwer, 2005)

Harvard Law and Economics Discussion Paper No. 488

32 Pages Posted: 29 Oct 2004 Last revised: 27 Aug 2016

Date Written: August 1, 2004

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 interact 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.

Keywords: corporate governance, agency costs, public firm, public corporation

JEL Classification: K4, H73, G34, G28

Suggested Citation

Roe, Mark J., The Institutions of Corporate Governance (August 1, 2004). Handbook of New Institutional Economics (Claude Ménard & Mary M. Shirley, eds.) (Kluwer, 2005), Harvard Law and Economics Discussion Paper No. 488, Available at SSRN: https://ssrn.com/abstract=612362 or http://dx.doi.org/10.2139/ssrn.612362

Mark J. Roe (Contact Author)

Harvard Law School ( email )

Griswold 502
Cambridge, MA 02138
United States
617-495-8099 (Phone)
617-495-4299 (Fax)

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