The Journal of Finance

Bibliography:

Title: « A Survey of Corporate Governance »

The article is accessible on the following link:

http://www.jstor.org/stable/2329497

The author: Andrei Shleifer and Robert W. Vishny

Number of page: 46 pages

Published by:  Wiley-Blackwell for the American Finance Association

Date of publication: Jun., 1997

Keywords: Corporate governance, board of directors

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Structure of the publication:

1. Abstract

2. The agency problem:

Contracts

Management Discretion

Incentive Contracts

Evidence on Agency Costs

3. Financing Without Governance

4. Legal Protection

5. Large Investors :

Large Shareholders

Takeovers

Large Creditors

6. The Costs of Large Investors

7. Specific Governance Arrangements:

The Debt Versus Equity Choice

LBO’s

Cooperatives and State Ownership

8. Which System is the Best? :

Legal Protection and Large Investors

Evolution of Governance Systems

What kind of Large Investors?

9. Conclusion

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Resume of the article:

“Surveys research on corporate governance” gives a special consideration to the

importance of legal protection of investors and of ownership concentration in

corporate governance systems around the world. (Issued from the abstract of the

article).

The article describes mainly corporate governance is a way where suppliers guarantee

for their own benefits a percentage of profit on their investment.

It is clearly stated that the importance of corporate governance arises in a firm because

of the separation between those who control and those who own the residual claims.

The basic of Corporate Governance in OECD (Organization for Economic

Cooperation and Development) Countries is the following: Strengths, Weaknesses &

Economic implications.

Corporate governance systems can be differentiated according to the degree of

ownership concentration and also by the identity of controlling shareholders. We have

two kinds of systems, outsider systems that are branded by dispersed ownership, and

insider systems characterized by concentrated ownership (can be under an individual

control).

Analysts’ points of view:

Ownership concentration and voting power concentration have a common positive

point which is increasing monitoring, and firm performance, in addition to the fact that

the controlling owner has an incentive of getting private benefits.

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Both concentrations cited above raises the risk that majority shareholders conspire

with management at the expense of small shareholders. The consequence of

controlling shareholders is the increase in the capital equity cost. When small investors

have illegal rights to protect a return on their investments, it may cause a critical

problem. So, ownership concentration and voting power concentration may become

harmful because these small investors avoid holding shares and the flow of external

capital to firms is brutally impeded (La Porta et. al. (1997), and Barca (1995)).

The Empirical Evidence:

The authors find that the empirical evidence proposes that control is valued only in the

case when controlling large shareholders received the same benefits as other investors.

The theory supports that buyers of shares should receive private benefits. Other

researches support the same point simply by doing a comparison between prices of

shares that have identical dividend rights but differential voting rights.

Agency Theory:

Agency theory says that the value of a firm can never be maximized for the simple

cause that managers own discretions that let them to steal value freely. If we were in

an idealist world, it would be an appropriate contract where specific profits statement

will be underlined that should be signed by managers.

Conclusion:

In this article, the authors’ lucidity statement is fundamental for their survey as they

define corporate governance as ‘the ways in which suppliers of finance to corporations

assure themselves of getting a return on their investment’. We stated above that the

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corporate governance suffer from the separation of management and finance. And the

question here is how to assure financiers that they get a return on their financial

investment? We refer also to the serious agency’s problem about the opportunities for

managers to abscond with financiers' capitals. To conclude, the point that we need to

remember is that corporate governance is a way where suppliers guarantee for their

own benefits a percentage of profit on their investment.

Derj Atar

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