A Survey of Corporate Governance

This article 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. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical importance. Even in advanced market economies, there is a great deal of disagreement on how good or bad the existing governance mechanisms are. For example, Easterbrook and Fischel (1991) and Romano (1993a) make a very optimistic assessment of the United States corporate governance system, whereas Jensen (1989a, 1993) believes that it is deeply flawed and that a major move from the current corporate form to much more highly leveraged organizations, similar to LBOs, is in order. There is also constant talk of replacing the Anglo-Saxon corporate governance systems with those patterned after Germany and Japan (see, for example, Roe (1993) and Charkham (1994)). But the United States, Germany, Japan, and the United Kingdom have some of the best corporate governance systems in the world, and the differences between * Shleifer is from Harvard University. Vishny is from the University of Chicago. Prepared for the Nobel Symposium on Law and Finance, Stockholm, August 1995. We are grateful to Oliver D. Hart for many conversations, to Doug Diamond, Frank Easterbrook, Milton Harris, Martin Hellwig, James Hines, Tor Jonsson, Steve Kaplan, Rafael La Porta, Florencio Lopez-de-Silanes, Raghu Rajan, David Scharfstein, Rene Stulz, and Luigi Zingales for comments, and to the NSF for financial support.