Measuring the Effectiveness of Different Corporate Governance Systems: Toward a More Scientific Approach
Bank of America Journal of Applied Corporate Finance, Vol. 63, No. 2, 1998.
Posted: 5 Oct 1998
Date Written: January 1998
Ever since publication of Berle and Means' 1932 classic, "The Modern Corporation and Private Property," many have believed that there are significant problems with the American system of corporate governance. In particular, the separation of ownership and control identified with the American publicly held corporation is said to produce an organizational structure in which shareholders face collective action problems that make it impossible for them effectively to monitor and discipline the management of the firms in which they have invested. Professional managers are said to be virtually unaccountable to shareholders.
Recently scholars have suggested that institutional investors are the group most likely to resolve America's corporate governance problem. Other commentators, however, have questioned the merits of having institutional investors take a more active role in corporate governance. Roberta Romano, for example, has shown that public pension funds face political constraints that are likely to prevent them from serving very effectively as monitors of corporate mangers. As for corporate pension funds and financial institutions, it has long been recognized that these institutions face conflicts of interest that prevent them from serving as effective representatives of the interest of outside shareholders. Jack Coffee has pointed out that the kind of long-term, "relational" investing required to make institutional investors a voice in corporate governance may be too costly to such investors because it will require them to sacrifice liquidity. Jill Fisch has argues that institutional investors may not find it rational to engage in relational investing unless they are given special benefits such as special information about control.
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