The state of corporate governance research

Corporate governance

The state of corporate governance research

This paper presents seven areas of corporate governance research by presenting papers in each topic. Topics discussed and presented are: shareholders and shareholder activism, corporate directors, executive compensation, controlling shareholders, cross border investing and management and political economies.


The core problem is that "while dispersed shareholders collectively have incentives to monitor the management of the firms for which they own stock, individually, the free-rider problem can ruin such incentives, leading to a lack of shareholder involvement in firms."

An assumption that's been well researched is that the distribution of share ownership will thus impact a firms performance. The paper presents many approaches and researches taken with this bent in mind over the past 70 years. However it's still unclear how much this relationship is established or even clearly in what direction (whether it's positive or not).

"To some, increasing shareholder power and facilitating shareholder intervention when necessary is part of the necessary reforms. To others, activism by shareholders who potentially have short-term interests is part of the problem, not a solution. To what extent (and when) can shareholder activism improve firm value and performance? To what extent (and when) can shareholder activism produce distortions that make matters worse?

Research by financial economists that seeks further light on these questions will provide valuable input to the questions with which decision-makers are wrestling."

Board of directors

This field of research focuses on the triangle of 'representative corporate governance'. Instead of trusting shareholder votes, they elect representatives to be a check on management. This triangle between shareholders, management and directors has been the subject of a lot of literature, especially around the incentive alignment and agency problem. This issue has given rise to independent directors. Beyond independence, trying to understand what impacts director efficacy has been researched, with information and expertise being offered.

Executive compensation

Executive compensation is the focal point for much research around misaligned incentives, especially post the financial crisis. There are two approaches to the literature: "One view (―the optimal contracting view‖) sees executive pay arrangements as the product of arm‘s length contracting between boards and executives, which leads to contracts that provide efficient incentives for reducing agency problems as much as possible (e.g., Holmstrom, 1979). An alternative view (―the managerial power view‖) questions whether pay arrangements are the product of arm‘s length contracting and sees such pay arrangements as part of the agency problem itself rather than as a solution to it (Bebchuk and Fried, 2003, 2004)."

Research has also focused on whether management merit the large pay gap that's formed between them and regular workers - whether this can be quantified and justified to some extent by market forces or whether it's a form of rent seeking by those close to the money spigot.

Controlling shareholders

This topic involves many of the same issues with a different set of characters. Here we're worried not about the lack of shareholder representation but rather rent seeking on behalf of the controlling shareholders against minority ones. A lot of research hasn't focused on this because it's believed that public companies in the US don't have this as much, however in the rest of the world it is a common structure. However, the assumption about the US is not necessarily true and controlling minority shareholders also exist, especially in technology companies for the past two decades (Google, Facebook as clear examples).

It's important to note that these structures are problematic: "Bebchuk, Kraakman, and Triantis (2000) show that such structures have the potential to create very large agency costs that are an order of magnitude larger than those associated with controlling shareholders who hold a majority of the cash flow rights in their companies."

International companies

Interesting: Until the 1990's most of the research on corporations was on US public companies. Since, research has been conducted to compare different countries' legal system and how that affects governance: "Does having a good legal system act as a substitute for firm-level choices? Or does it facilitate firm-level governance, making the two types of governance complements?"

Some findings have shown that with weak legal recourse it is less beneficial to invest in governance - as there's less ways to enforce.

Cross border investment

A significant amount of research is dedicated to firms domiciled in one country who list in another country and are therefore governed by that countries laws.

Political structures

Politics and existing legal frameworks in countries are a fact that can't be ignored. Systems with strong investor protections, IP laws and property rights have different governance structures and outcomes than those that don't. The same can be said for systems with political value capture, corruption etc.