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Manne, Henry G. --- "Corporate Governance – Getting Back to Market Basics" [2010] ELECD 402; in Pacces, M. Alessio (ed), "The Law and Economics of Corporate Governance" (Edward Elgar Publishing, 2010)

Book Title: The Law and Economics of Corporate Governance

Editor(s): Pacces, M. Alessio

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848448971

Section: Chapter 4

Section Title: Corporate Governance – Getting Back to Market Basics

Author(s): Manne, Henry G.

Number of pages: 14

Extract:

4. Corporate governance ­ getting
back to market basics
Henry G. Manne

1. INTRODUCTION

The subject of the governance of corporations with some non-controlling
shareholders has come to the fore both politically and academically in
recent years. These firms may be diffused-ownership, as characterizes
many larger US companies, or they may be companies with a single
controlling block of shares, whether owned or voted by individuals or
intermediaries, as has largely characterized companies in Europe and
most of the rest of the world. In either case, the fundamental problem
of governance is always seen as how to protect the interests of the non-
controlling shareholders (and in some cases stakeholders) from financial
depredation by the controlling shareholders or the managers of the
firm.
Anyone reading this chapter will immediately recognize this as the
famous `agency cost' problem identified nearly forty years ago by Michael
Jensen and William Meckling,1 though their immediate interest was less
in the abusive behavior of controlling shareholders than it was with man-
agers themselves. For our purposes right now, however, we may simply
assume a concurrence of interests between those two, a condition we will
relax as the story unfolds.
This conflict, or perhaps better, tension of interests was first noted
without any supporting economic theory by Berle and Means in their
classic The Modern Corporation and Private Property in 1933.2 There the
problem was seen largely as one of diffused shareholders being unable to
coordinate their monitoring efforts effectively to prevent managers ...