Ownership-Based Governance: Corporate Governance for the New Millennium

Posted: 10 Sep 1999

Abstract

This paper is an outline of corporate governance--its scope, its history and suggestions for improving its effectiveness in the United States. The goal of governance is maximizing wealth creation to the extent it is compatible with the overall interests of society. America has attempted to balance centralized power, public and private, with the interests of the individual citizen, lawmakers' and judges' relying on the theoretical powers of owners to assure corporate responsibility. The current system of shareholder and director oversight is limited, and unfortunately so are the proposals by scholars and practitioners to increase the number of "independent" directors as the key to effective corporate governance. Institutional shareholders in the United States today and focus particularly on the pension system--holder of 30 percent of the total equity capital-- are the new "permanent and universal" owner of the private enterprise system. This provides a legal basis for a "Federal Law of Ownership," establishing corporate governance standards through the policies of the U.S. Department of Labor, which has jurisdiction over private pension funds. In a system that has many owners with relatively small percentage stakes, the most significant obstacles to effective monitoring are "collective action" or "free rider" problems and conflicts of interest. We make specific proposals to improve the effectiveness of an ownership-based governance system in the United States, including dividing equity holdings between "ownership" and "trading" categories. This would accommodate the legitimate needs of certain classes of investor who place a premium on liquidity while permitting other classes of investor, the "permanent" owners, to exercise a rational level of oversight, and the development of new special purpose "fiduciary ownership" in situations.

JEL Classification: G32

Suggested Citation

Monks, Robert A.G. and Minow, Nell, Ownership-Based Governance: Corporate Governance for the New Millennium. Available at SSRN: https://ssrn.com/abstract=6148

Robert A.G. Monks

Harvard College ( email )

Cambridge, MA 02138
United States

No contact information is available for Nell Minow

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