Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany

Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany

Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany

Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany

Synopsis

A challenging and informed examination of the links between the general business environment and the operations, decisions, and organisation of firms. O'Sullivan explores the links between the two 'hot' issues, corporate governance and innovation.

Excerpt

The question of how corporations should be governed to enhance corporate and economic performance has been widely discussed in the last two decades in the United States and Britain. Until recently, the subject of corporate governance has attracted much less attention on the European continent, in Asia, and in other parts of the world. By the late 1990s, however, corporate governance had become a major, and highly contentious, issue in all of the advanced economies and, increasingly, in developing countries as well. International organizations, including the OECD, the World Bank, and the IMF, have devoted increasing attention to corporate governance as a topic of global concern.

Contemporary debates about corporate governance stem, in part, from the recognition by economists of the centrality of corporate enterprises for allocating resources in the economy. In most economies, corporate enterprises play a critical role in shaping economic outcomes through the decisions that they make about investments, employment, and trade. That is, an economy's performance is importantly related to the process through which corporate revenues are allocated. Retained earnings—undistributed profits and capital consumption allowances—have always provided, and continue to provide, the financial resources that are the foundations of investments in productive capabilities. How major corporations allocate their vast revenues is a matter of strategic choice, and the strategic choices of corporate decision-makers can have profound effects on the performance of the economy as a whole.

Economic analysis is focused on resource allocation—what is to be produced, how it is to be produced, and for whom it is to be produced. To address these issues, economists strive to find answers to the following types of question: 'How should these resource allocation decisions be made? Who should make these decisions? How can those who are responsible for making these decisions be induced to make the right decisions? How are they to know what and how much information to acquire before making the decisions? How can the separate decisions of the millions of actors—decision makers—in the economy be controlled?' (Stiglitz 1994: 13)' Corporate governance is concerned with the institutions that influence how business corporations allocate resources and returns. Specifically, a system of corporate governance shapes who makes investment decisions in corporations, what types of investments they make, and how returns from investments are distributed. My interest in corporate governance, like that of most economists, is with its implications for economic outcomes at the enterprise and societal levels. The central focus of this book is the relationship between systems of corporate governance and the economic performance of corporate enterprises themselves and the economies in which they are embedded.

In approaching corporate governance from the perspective of economic analysis, I will ignore studies of corporate governance that either do not deal with economic performance, or make unsubstantiated assumptions about its generation. There is,

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