Summary articles Corporate Governance
Denis (2019): The case for maximizing long-run shareholder value
Greatest advantage of public corporation: limited liability, tradable shares, and status as a separate
legal entity allow and encourage the separation of the ownership and control of business enterprises,
and the specialization of management and risk-bearing that such separation makes possible.
This specialization in turn allows management teams with well-established capabilities and
experience to raise the equity capital needed to build “scalable” companies, even if the managers’
personal wealth and appetite for risk are limited.
Corporations, especially large ones, frequently arouse scepticism, mistrust and even outright hostility.
Corporate governance comprises the set of mechanisms that encourage the managers of public
corporations to make decisions that maximize the long-run value of the shareholders who are said –
somewhat misleadingly – to “own” those corporations.
Primary governance model = shareholders value maximization.
Alternative model: stakeholder model The goal of the corporation – and thus of its managers – is
to serve the interests of all its stakeholders rather than the interests of shareholders alone.
Many models emphasize an overarching responsibility of corporations to the general social welfare.
Two primary issues:
1. Critics of the value maximization model of governance often fail to understand that shareholders
are “residual claimants”. Their claims to corporate cash flows and assets come at the very end of the
line.
2. The corporation does not exist in a vacuum. The actions of corporate managers are effectively
governed by “external” parties whose aims may have little to do with corporate value maximization.
Important external corporate governance mechanisms:
Media
Government
Maximizing shareholder value is equivalent to maximizing the amount of cash flow that remains after
all other claimholders receive their due.
Corporations are “simply legal fictions which serve as a nexus for a set of contracting relationships
among individuals”.
Advantage of market prices is that they represent the intersection of supply and demand by all
interested parties.
Committing to value maximization as the corporate goal is in no way equivalent to saying that only
shareholders’ interests matter.
Direct corporate stakeholders: those who willingly enter into relationships with individual firms by
purchasing their products, working for them, selling raw materials to them, etc.
Indirect (or involuntary) corporate stakeholders: parties who do not directly enter into relationships
with individual companies but are nonetheless affected by corporate actions.
Effect of such externalities are negative: they represent a situation in which stakeholders may be
unable to fully protect their own interests against those of corporations.
The existence of externalities and market frictions does not imply that something other than
shareholder wealth maximization should drive managerial decision-making.
Denis (2019): The case for maximizing long-run shareholder value
Greatest advantage of public corporation: limited liability, tradable shares, and status as a separate
legal entity allow and encourage the separation of the ownership and control of business enterprises,
and the specialization of management and risk-bearing that such separation makes possible.
This specialization in turn allows management teams with well-established capabilities and
experience to raise the equity capital needed to build “scalable” companies, even if the managers’
personal wealth and appetite for risk are limited.
Corporations, especially large ones, frequently arouse scepticism, mistrust and even outright hostility.
Corporate governance comprises the set of mechanisms that encourage the managers of public
corporations to make decisions that maximize the long-run value of the shareholders who are said –
somewhat misleadingly – to “own” those corporations.
Primary governance model = shareholders value maximization.
Alternative model: stakeholder model The goal of the corporation – and thus of its managers – is
to serve the interests of all its stakeholders rather than the interests of shareholders alone.
Many models emphasize an overarching responsibility of corporations to the general social welfare.
Two primary issues:
1. Critics of the value maximization model of governance often fail to understand that shareholders
are “residual claimants”. Their claims to corporate cash flows and assets come at the very end of the
line.
2. The corporation does not exist in a vacuum. The actions of corporate managers are effectively
governed by “external” parties whose aims may have little to do with corporate value maximization.
Important external corporate governance mechanisms:
Media
Government
Maximizing shareholder value is equivalent to maximizing the amount of cash flow that remains after
all other claimholders receive their due.
Corporations are “simply legal fictions which serve as a nexus for a set of contracting relationships
among individuals”.
Advantage of market prices is that they represent the intersection of supply and demand by all
interested parties.
Committing to value maximization as the corporate goal is in no way equivalent to saying that only
shareholders’ interests matter.
Direct corporate stakeholders: those who willingly enter into relationships with individual firms by
purchasing their products, working for them, selling raw materials to them, etc.
Indirect (or involuntary) corporate stakeholders: parties who do not directly enter into relationships
with individual companies but are nonetheless affected by corporate actions.
Effect of such externalities are negative: they represent a situation in which stakeholders may be
unable to fully protect their own interests against those of corporations.
The existence of externalities and market frictions does not imply that something other than
shareholder wealth maximization should drive managerial decision-making.
