Corporate governance mechanisms for publicly-traded companies

Abstract

The resolution of conflicts between shareholders and managers, at minimal cost, is the goal of corporate governance. This paper discusses four mechanisms, two internal, two external, that attempt to ensure managers act in the best interests of shareholders: 1) the board of directors, 2) management compensation plans, 3) the market, and 4) takeovers. Theoretically, these four forms of corporate governance should ensure management maximizes shareholder value. But, agency costs are real for shareholders. In practice each the mechanisms may be severely limited in their ability to protect shareholders. The best protection is an independent, credible board of directors. Without good boards, shareholders are left to the mercy of the agents. In such cases, it is very difficult, and expensive, to discipline the senior managers of a publicly-traded company.