The Basic Governance Structure: The Interests of Shareholders as a Class

40 Pages Posted: 26 Jan 2017 Last revised: 14 Mar 2017

John Armour

University of Oxford - Faculty of Law; University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Luca Enriques

University of Oxford Faculty of Law; European Corporate Governance Institute (ECGI)

Henry Hansmann

Yale Law School; European Corporate Governance Institute (ECGI)

Reinier Kraakman

Harvard Law School; European Corporate Governance Institute

Date Written: January 16, 2017

Abstract

This paper is the third chapter of the third edition of The Anatomy of Corporate Law: A Comparative and Functional Approach, by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda Mariana Pargendler, Georg Ringe, and Edward Rock (Oxford University Press, 2017). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its third edition, the book has been significantly revised and expanded.

Chapter 3 examines legal strategies employed in representative “core jurisdictions” to mitigate manager-shareholder conflicts. Agency problems arise from two of the core features of the corporate form: investor ownership, which often results in ultimate control being held by shareholders far removed from the firm’s day-to-day operations; and delegated management, which opens up the possibility for opportunistic behavior. This chapter describes how legal strategies outlined in Chapter 2 of the book are utilized to solve the trade-offs resulting from the interaction of investor ownership with delegated management. It describes the use of appointment rights, by which shareholders retain the right to appoint and remove directors. Next, it focuses on core decision rights and how their effectiveness is related to the problem of shareholder coordination costs. It then considers reward strategies and independent directors as a popular trusteeship strategy, while also highlighting differences in and commonalities in the regulation of executive compensation. The chapter briefly reviews legal rules and standards and disclosure as additional tools, before reflecting upon why some divergence in the basic corporate governance structure persists across our sample jurisdictions.

Keywords: Shareholder-Management Conflict; One-Tier and Two-Tier Boards; Director Appointment; Directors Removal; Decision Rights; Shareholder Coordination; Independent Directors; Executive Compensation

JEL Classification: D23, G32, G34, G38, K22

Suggested Citation

Armour, John and Enriques, Luca and Hansmann, Henry and Kraakman, Reinier, The Basic Governance Structure: The Interests of Shareholders as a Class (January 16, 2017). European Corporate Governance Institute (ECGI) - Law Working Paper No. 337/2017; Oxford Legal Studies Research Paper No. 11/2017. Available at SSRN: https://ssrn.com/abstract=2901416 or http://dx.doi.org/10.2139/ssrn.2901416

John Armour

University of Oxford - Faculty of Law ( email )

Oriel College
Oxford, OX1 4EW
United Kingdom
+44 1865 286544 (Phone)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Luca Enriques

University of Oxford Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Henry Hansmann (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4966 (Phone)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Reinier H. Kraakman

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-496-3586 (Phone)
617-496-6118 (Fax)

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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