A survey of corporate governance

This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

Findings:

• the agency problem (the separation of management and finance) is serious. The opportunities for managers to abscond with financiers’ funds, or to squander them on pet projects, are plentiful and well-documented
• financing based on reputations of manager, or on excessively optimistic expectations of investors, without governance is unlikely to be the whole story. Legal protection of investor rights is one of the element of corporate governance. Concentrating ownership through large shareholdings, takeovers and bank finance, is a nearly universal method of control that helps investors to get their money back. Although large investors can be very effective in solving the agency problem, they may also inefficiently redistribute wealth from other investors to themselves
• successful corporate governance systems, such as those of the USA, Germany and Japan, combine significant legal protection of at least some investors with an important role for large investors. This combination separates them from governance systems in most countries, which provide extremely limited legal protection of investors and are stuck with family and insider-dominated firms receiving little extra financing

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