Summary Corporate Ownership and Governance
Summary of all sessions
1
,Table of Contents
1. Session 1 – Corporate Strategy and the Theory of the Firm (Boundaries) ............................................... 4
1.1. Articles ................................................................................................................................................. 4
1.1.1. Kraakman, R, et al. (2009, 2nd edition) The Anatomy of Corporate Law; A Functional and
Comparative Analysis, Oxford: Oxford University Press, Chapter 1, ‘What is Corporate Law?’, p.1-19. ...... 4
1.1.2. Ketokivi, M. & Mahoney, J.T. (2017) Transaction Cost Economics as a Theory of the Firm,
Management, and Governance. Oxford Research Encyclopedia of Business and Management. Retrieved
28 Aug. 2019. .............................................................................................................................................. 11
1.1.3. Santos, F. & Eisenhardt, K., 2005. Organizational Boundaries and Theories of Organization,
Organization Science, 16 (5). ....................................................................................................................... 16
1.2. Lecture Notes ..................................................................................................................................... 24
2. Session 2 – Ownership of the Firm....................................................................................................... 30
2.1. Articles ............................................................................................................................................... 30
2.1.1. Hansmann, H. (1988). Ownership of the Firm. Journal of Law, Economics, & Organization, Vol. 4,
No. 2 (Autumn, 1988), pp. 267-304............................................................................................................. 30
2.1.2. Dobbs, R, Huyett, B. & Koller, T. 2010 Are you still the best owner of your assets? McKinsey
Quarterly, 1, p. 107-111 .............................................................................................................................. 38
2.2. Lecture Notes ..................................................................................................................................... 40
3. Session 3 - Skills Workshop: Sum of the Parts Valuation in a Corporate Break-up Scenario .................. 45
3.1. Summary of Chapters 1, 2, and 3 of the Book.................................................................................... 45
3.1.1. Introduction .................................................................................................................................. 45
3.1.2. Chapter 1 – Corporate Advantage ................................................................................................ 45
3.1.3. Chapter 2 – Synergies: Benefits to Collaboration ......................................................................... 49
3.1.4. Chapter 3 – Governance Costs: Impediments to Collaboration.................................................... 53
3.2. Lecture Notes – Arjen Mulder ............................................................................................................ 57
4. Session 4 - The Corporate Governance Challenges and Practices of Publicly Listed Firms ..................... 60
4.1. Articles ............................................................................................................................................... 60
4.1.1. Dalton, D. Hitt, M. Certo, S. & Dalton, C. (2007). ‘The fundamental agency problem and its
mitigation’. Academy of Management Annals, 1, 1–64. ............................................................................. 60
4.1.2. Aguilera, R., Desender, K. Bednar, M.K. & Lee, J.H. (2015) Connecting the Dots: Bringing External
Corporate Governance into the Corporate Governance Puzzle, The Academy of Management Annals, 9:1,
483-573 72
4.2. Lecture Notes ..................................................................................................................................... 87
5. Session 5 – The Corporate Governance Challenges and Practices of Family-Owned Firms .................... 92
5.1. Articles ............................................................................................................................................... 92
5.1.1. Rafi Amit & Belen Vilalonga, 2013 ‘Primer on Family Enterprise’, World Economic Forum Report.
92
5.1.2. B. Villalonga, Raffi Amit, M. A. Trujillo, A. Guzman (2015), ‘Governance of Family Firms’, Annual
Review of Financial Economics, 7, pp. 635-654......................................................................................... 106
5.2. Lecture Notes ................................................................................................................................... 111
6. Session 6 - Stakeholders in Corporate Governance .............................................................................115
6.1. Articles ............................................................................................................................................. 115
6.1.1. Hillman, A. J., Withers, M. C., & Collins, B. J. 2009. Resource dependence theory: A review.
Journal of Management, 35(6): 1404-1427............................................................................................... 115
6.2. Lecture Notes ................................................................................................................................... 119
2
,7. Session 7 – Skills Workshop: Stakeholder Analysis..............................................................................124
7.1. Videos .............................................................................................................................................. 124
7.1.1. Video 1: Identifying Stakeholders ............................................................................................... 124
7.1.2. Video 2: Mapping Stakeholders .................................................................................................. 124
7.1.3. Manage Stakeholders in Strategy ............................................................................................... 125
8. Session 8 – Securing the Societal License to Operate: Non-Market Strategy .......................................126
8.1. Articles ............................................................................................................................................. 126
8.1.1. David Baron, 1995. Integrated Strategy: Market and Nonmarket Components, California
Management Review, 37:2 ....................................................................................................................... 126
8.1.2. Vishwanathanatan, P, Van Oosterhout, J., Heugens, P., Duran, P & Van Essen, M. (2019) Strategic
CSR: A Concept Building Meta-Analysis. Journal of Management. ........................................................... 130
9. Glossary .............................................................................................................................................133
3
,1. Session 1 – Corporate Strategy and the Theory of the Firm (Boundaries)
1.1. Articles
1.1.1. Kraakman, R, et al. (2009, 2nd edition) The Anatomy of Corporate Law; A Functional
and Comparative Analysis, Oxford: Oxford University Press, Chapter 1, ‘What is
Corporate Law?’, p.1-19.
Instruction: ‘please focus on the five characteristics of corporations’.
What is the common structure of the law of business corporations across different national
jurisdictions? There is divergence among European, American and Japanese corporations in
corporate governance, share ownership, capital markets and business culture, but business
corporations have a fundamentally similar set of legal characteristics in all jurisdictions.
The five basic legal characteristics of the business corporation are:
1. Legal personality;
2. Limited liability;
3. Transferable shares;
4. Delegated management under a board structure;
5. Ownership.
These characteristics are included by the economic exigencies of the large modern business
enterprise. There are forms of business enterprise that lack one or more of these
characteristics, but in market economies, almost all large-scale business firms (and small
jointly owned firms as well) adopt a legal form possessing all five of the basic characteristics.
The term ‘closely held’ refers to corporations – whose shares unlike those of ‘publicly held’
corporations – do not trade freely in impersonal markets because of restrictions that limit
their transferability.
Corporate law: principal function is to provide business enterprises with a legal form that
possesses the five core attributes. By making this form widely available and user-friendly,
corporate law can enable entrepreneurs to transact easily through the medium of the
corporate entity and the cost of business contracting can be lowered.
- The provisions of the typical corporation statute comprise the legal core of corporate
law that is shared by every jurisdiction.
- Equally important function corporate law: constraining value-reducing forms of
opportunism among the constituencies of the corporate enterprise.
There are three principal conflicts within corporations that give rise to problems that are
usefully characterized as ‘agency problems’. They are:
- Those between managers and shareholders.
- Those among shareholders.
- Those between shareholders and the corporation’s other constituencies (e.g.,
creditors and employees).
4
,These conflicts are not uniquely ‘corporate’. Any form of jointly owned enterprise must expect
such conflicts. Nevertheless, the form of ‘corporation’ is chosen by most large-scale
enterprises, and the only form widely held firms can choose in many jurisdictions.
The fact that shareholders enjoy limited liability has made creditor protection more salient in
corporate law than in partnership law. Besides, anonymous trading on the stock market has
encouraged the separation of ownership from control and has sharpened the management-
shareholder agency problem.
In this article, a strongly functional (or ‘economic’) approach to the issues of comparative law
is chosen. The objective is to explore the commonality of corporate law across jurisdictions,
while offering a common language and a general analytic framework to understand the
purposes that can potentially be served by corporate law.
What Is a Corporation?
In all economically important jurisdictions, there is a basic statute that provides for the
formation of firms with the five basic characteristics. These five core structural characteristics
have strongly complementary qualities for many firms and make the corporation uniquely
attractive for organizing productive activity.
Not all firms need to have all five characteristics. This can happen when:
- Firms are formed under a jurisdiction’s basic corporate statute, taking advantage of
the statute’s flexibility to omit one or more.
- Firms are formed under special ‘close’ corporation statutes that provide mechanisms
for restricting the transferability of shares:
o GmbH (Gesellschaft mit beschränkter Haftung).
o SARL (Société à responsibilité limitée).
o The British private corporation.
o The Japanese close corporation.
o The close corporation forms provided for in some U.S. jurisdictions.
1. Legal Personality
The first basic characteristic is legal personality. It defines the firm as a nexus of contracts: a
single party that coordinates the activities of suppliers of inputs and of consumers of products
and services.
Legal personality: a contracting party distinct from the various individuals who own or
manage the firm or are suppliers or customers of the firm.
- Separate patrimony: the ability of the firm to own assets that are distinct from the
property of other persons, such as the firm’s investors, and that the firm is free not
only to use and sell but pledge to creditors.
o Affirmative asset partitioning: the asset-pledging effect of legal personality
that involves shielding the assets of the entity (the corporation) from the
creditors of the entity’s managers and owners.
5
, There are two rules of law involved in corporations:
- First rule: grants to creditors of the firm, as security for the firm’s debts, a claim on the
firm’s assets that is prior to the claims of the personal creditors of the firm’s owners.
o Shared by all modern legal forms for enterprise organization, including
partnerships.
o Consequence: a firm’s assets are automatically pledged as security for
contractual liabilities.
o Advantage: increase the credibility.
- Second rule: provides that the individual owners of the corporation cannot withdraw
their shares of firm assets at will, forcing partial or complete liquidation of the firm,
nor can the personal creditors of an individual owner foreclose on the owner’s share
of firm assets (‘liquidation protection’ rule).
o Not found in e.g., partnerships.
o Advantage: protects the going concern value of the firm against destruction by
shareholders or creditors. Grants a ‘strong form’ legal personality:
§ Reinforces creditworthiness and stability.
§ Protects assets of the firm from creditors.
§ Isolates the value of the firm from the personal financial affairs of
owners.
Legal personality is distinguished from the other four basic elements as those could all be
crafted by contractual means even without a standard form of enterprise organization that
embodies them.
2. Limited Liability
Limited liability (‘defensive asset partitioning’) is the second core characteristic and reserves
shareholders’ individual assets exclusively for their personal creditors, while corporation
assets are reserved for corporation creditors. Benefits:
- This allocation generally increases the value of both types of assets as security for debt.
- Permits creditors of the corporation to have the first claim on assets, who have a
comparative advantage in evaluating and monitoring.
- Permits individual’s personal creditors to have first claim on personal assets which
creditors of the corporation are not in a good position to check.
- Together with legal personality, limited liability reduces the overall cost of capital to
the firm and its owners. It permits firms to isolate different lines of business for the
purpose of obtaining credit.
- The formation of corporations and subsidiary corporations can be used as a means of
sharing the risks of transactions with the parties which a firm forms a contract with.
Besides, limited liability permits flexibility in the allocation of risk and return between equity
holders and debtholders, reduces transaction costs of collection in case of insolvency, and
simplifies/stabilizes the pricing of stock.
Limited liability in contract: limited liability to voluntary creditors who have contractual claims
on the corporation.
6
Summary of all sessions
1
,Table of Contents
1. Session 1 – Corporate Strategy and the Theory of the Firm (Boundaries) ............................................... 4
1.1. Articles ................................................................................................................................................. 4
1.1.1. Kraakman, R, et al. (2009, 2nd edition) The Anatomy of Corporate Law; A Functional and
Comparative Analysis, Oxford: Oxford University Press, Chapter 1, ‘What is Corporate Law?’, p.1-19. ...... 4
1.1.2. Ketokivi, M. & Mahoney, J.T. (2017) Transaction Cost Economics as a Theory of the Firm,
Management, and Governance. Oxford Research Encyclopedia of Business and Management. Retrieved
28 Aug. 2019. .............................................................................................................................................. 11
1.1.3. Santos, F. & Eisenhardt, K., 2005. Organizational Boundaries and Theories of Organization,
Organization Science, 16 (5). ....................................................................................................................... 16
1.2. Lecture Notes ..................................................................................................................................... 24
2. Session 2 – Ownership of the Firm....................................................................................................... 30
2.1. Articles ............................................................................................................................................... 30
2.1.1. Hansmann, H. (1988). Ownership of the Firm. Journal of Law, Economics, & Organization, Vol. 4,
No. 2 (Autumn, 1988), pp. 267-304............................................................................................................. 30
2.1.2. Dobbs, R, Huyett, B. & Koller, T. 2010 Are you still the best owner of your assets? McKinsey
Quarterly, 1, p. 107-111 .............................................................................................................................. 38
2.2. Lecture Notes ..................................................................................................................................... 40
3. Session 3 - Skills Workshop: Sum of the Parts Valuation in a Corporate Break-up Scenario .................. 45
3.1. Summary of Chapters 1, 2, and 3 of the Book.................................................................................... 45
3.1.1. Introduction .................................................................................................................................. 45
3.1.2. Chapter 1 – Corporate Advantage ................................................................................................ 45
3.1.3. Chapter 2 – Synergies: Benefits to Collaboration ......................................................................... 49
3.1.4. Chapter 3 – Governance Costs: Impediments to Collaboration.................................................... 53
3.2. Lecture Notes – Arjen Mulder ............................................................................................................ 57
4. Session 4 - The Corporate Governance Challenges and Practices of Publicly Listed Firms ..................... 60
4.1. Articles ............................................................................................................................................... 60
4.1.1. Dalton, D. Hitt, M. Certo, S. & Dalton, C. (2007). ‘The fundamental agency problem and its
mitigation’. Academy of Management Annals, 1, 1–64. ............................................................................. 60
4.1.2. Aguilera, R., Desender, K. Bednar, M.K. & Lee, J.H. (2015) Connecting the Dots: Bringing External
Corporate Governance into the Corporate Governance Puzzle, The Academy of Management Annals, 9:1,
483-573 72
4.2. Lecture Notes ..................................................................................................................................... 87
5. Session 5 – The Corporate Governance Challenges and Practices of Family-Owned Firms .................... 92
5.1. Articles ............................................................................................................................................... 92
5.1.1. Rafi Amit & Belen Vilalonga, 2013 ‘Primer on Family Enterprise’, World Economic Forum Report.
92
5.1.2. B. Villalonga, Raffi Amit, M. A. Trujillo, A. Guzman (2015), ‘Governance of Family Firms’, Annual
Review of Financial Economics, 7, pp. 635-654......................................................................................... 106
5.2. Lecture Notes ................................................................................................................................... 111
6. Session 6 - Stakeholders in Corporate Governance .............................................................................115
6.1. Articles ............................................................................................................................................. 115
6.1.1. Hillman, A. J., Withers, M. C., & Collins, B. J. 2009. Resource dependence theory: A review.
Journal of Management, 35(6): 1404-1427............................................................................................... 115
6.2. Lecture Notes ................................................................................................................................... 119
2
,7. Session 7 – Skills Workshop: Stakeholder Analysis..............................................................................124
7.1. Videos .............................................................................................................................................. 124
7.1.1. Video 1: Identifying Stakeholders ............................................................................................... 124
7.1.2. Video 2: Mapping Stakeholders .................................................................................................. 124
7.1.3. Manage Stakeholders in Strategy ............................................................................................... 125
8. Session 8 – Securing the Societal License to Operate: Non-Market Strategy .......................................126
8.1. Articles ............................................................................................................................................. 126
8.1.1. David Baron, 1995. Integrated Strategy: Market and Nonmarket Components, California
Management Review, 37:2 ....................................................................................................................... 126
8.1.2. Vishwanathanatan, P, Van Oosterhout, J., Heugens, P., Duran, P & Van Essen, M. (2019) Strategic
CSR: A Concept Building Meta-Analysis. Journal of Management. ........................................................... 130
9. Glossary .............................................................................................................................................133
3
,1. Session 1 – Corporate Strategy and the Theory of the Firm (Boundaries)
1.1. Articles
1.1.1. Kraakman, R, et al. (2009, 2nd edition) The Anatomy of Corporate Law; A Functional
and Comparative Analysis, Oxford: Oxford University Press, Chapter 1, ‘What is
Corporate Law?’, p.1-19.
Instruction: ‘please focus on the five characteristics of corporations’.
What is the common structure of the law of business corporations across different national
jurisdictions? There is divergence among European, American and Japanese corporations in
corporate governance, share ownership, capital markets and business culture, but business
corporations have a fundamentally similar set of legal characteristics in all jurisdictions.
The five basic legal characteristics of the business corporation are:
1. Legal personality;
2. Limited liability;
3. Transferable shares;
4. Delegated management under a board structure;
5. Ownership.
These characteristics are included by the economic exigencies of the large modern business
enterprise. There are forms of business enterprise that lack one or more of these
characteristics, but in market economies, almost all large-scale business firms (and small
jointly owned firms as well) adopt a legal form possessing all five of the basic characteristics.
The term ‘closely held’ refers to corporations – whose shares unlike those of ‘publicly held’
corporations – do not trade freely in impersonal markets because of restrictions that limit
their transferability.
Corporate law: principal function is to provide business enterprises with a legal form that
possesses the five core attributes. By making this form widely available and user-friendly,
corporate law can enable entrepreneurs to transact easily through the medium of the
corporate entity and the cost of business contracting can be lowered.
- The provisions of the typical corporation statute comprise the legal core of corporate
law that is shared by every jurisdiction.
- Equally important function corporate law: constraining value-reducing forms of
opportunism among the constituencies of the corporate enterprise.
There are three principal conflicts within corporations that give rise to problems that are
usefully characterized as ‘agency problems’. They are:
- Those between managers and shareholders.
- Those among shareholders.
- Those between shareholders and the corporation’s other constituencies (e.g.,
creditors and employees).
4
,These conflicts are not uniquely ‘corporate’. Any form of jointly owned enterprise must expect
such conflicts. Nevertheless, the form of ‘corporation’ is chosen by most large-scale
enterprises, and the only form widely held firms can choose in many jurisdictions.
The fact that shareholders enjoy limited liability has made creditor protection more salient in
corporate law than in partnership law. Besides, anonymous trading on the stock market has
encouraged the separation of ownership from control and has sharpened the management-
shareholder agency problem.
In this article, a strongly functional (or ‘economic’) approach to the issues of comparative law
is chosen. The objective is to explore the commonality of corporate law across jurisdictions,
while offering a common language and a general analytic framework to understand the
purposes that can potentially be served by corporate law.
What Is a Corporation?
In all economically important jurisdictions, there is a basic statute that provides for the
formation of firms with the five basic characteristics. These five core structural characteristics
have strongly complementary qualities for many firms and make the corporation uniquely
attractive for organizing productive activity.
Not all firms need to have all five characteristics. This can happen when:
- Firms are formed under a jurisdiction’s basic corporate statute, taking advantage of
the statute’s flexibility to omit one or more.
- Firms are formed under special ‘close’ corporation statutes that provide mechanisms
for restricting the transferability of shares:
o GmbH (Gesellschaft mit beschränkter Haftung).
o SARL (Société à responsibilité limitée).
o The British private corporation.
o The Japanese close corporation.
o The close corporation forms provided for in some U.S. jurisdictions.
1. Legal Personality
The first basic characteristic is legal personality. It defines the firm as a nexus of contracts: a
single party that coordinates the activities of suppliers of inputs and of consumers of products
and services.
Legal personality: a contracting party distinct from the various individuals who own or
manage the firm or are suppliers or customers of the firm.
- Separate patrimony: the ability of the firm to own assets that are distinct from the
property of other persons, such as the firm’s investors, and that the firm is free not
only to use and sell but pledge to creditors.
o Affirmative asset partitioning: the asset-pledging effect of legal personality
that involves shielding the assets of the entity (the corporation) from the
creditors of the entity’s managers and owners.
5
, There are two rules of law involved in corporations:
- First rule: grants to creditors of the firm, as security for the firm’s debts, a claim on the
firm’s assets that is prior to the claims of the personal creditors of the firm’s owners.
o Shared by all modern legal forms for enterprise organization, including
partnerships.
o Consequence: a firm’s assets are automatically pledged as security for
contractual liabilities.
o Advantage: increase the credibility.
- Second rule: provides that the individual owners of the corporation cannot withdraw
their shares of firm assets at will, forcing partial or complete liquidation of the firm,
nor can the personal creditors of an individual owner foreclose on the owner’s share
of firm assets (‘liquidation protection’ rule).
o Not found in e.g., partnerships.
o Advantage: protects the going concern value of the firm against destruction by
shareholders or creditors. Grants a ‘strong form’ legal personality:
§ Reinforces creditworthiness and stability.
§ Protects assets of the firm from creditors.
§ Isolates the value of the firm from the personal financial affairs of
owners.
Legal personality is distinguished from the other four basic elements as those could all be
crafted by contractual means even without a standard form of enterprise organization that
embodies them.
2. Limited Liability
Limited liability (‘defensive asset partitioning’) is the second core characteristic and reserves
shareholders’ individual assets exclusively for their personal creditors, while corporation
assets are reserved for corporation creditors. Benefits:
- This allocation generally increases the value of both types of assets as security for debt.
- Permits creditors of the corporation to have the first claim on assets, who have a
comparative advantage in evaluating and monitoring.
- Permits individual’s personal creditors to have first claim on personal assets which
creditors of the corporation are not in a good position to check.
- Together with legal personality, limited liability reduces the overall cost of capital to
the firm and its owners. It permits firms to isolate different lines of business for the
purpose of obtaining credit.
- The formation of corporations and subsidiary corporations can be used as a means of
sharing the risks of transactions with the parties which a firm forms a contract with.
Besides, limited liability permits flexibility in the allocation of risk and return between equity
holders and debtholders, reduces transaction costs of collection in case of insolvency, and
simplifies/stabilizes the pricing of stock.
Limited liability in contract: limited liability to voluntary creditors who have contractual claims
on the corporation.
6
