What is corporate governance?
This is a study of corporate governance, with particular reference to listed companies in China. The theoretical framework underpinning the book is the incomplete contracts, or property rights, approach which recognises that issues related to firms' ownership structure, capital structure
and corporate control cannot be fully understood if one assumes a world of comprehensive contracts that can define all future contingencies. Rather, contracts are incomplete and economic agents are endowed with rights to specify actions in future contingencies not specified in prior contracts, that is they are endowed with property or ownership rights.In applying this framework to modern corporations, we find that the combination of the separation of ownership and control, and the incompleteness of contracts, may lead to agency problems: that is, a situation where the management
of the corporations, who are the agents of the shareholders (the principals), may have private interests that conflict with those of some or all of the shareholders. There is thus a need for a sound corporate governance system through which management can be induced to ensure the maximisation of shareholders' wealth whilst protecting the interests of all parties involved, including the managers, large and small shareholders, and creditors.Two decades ago, the term 'corporate governance' had not been coined (Kay and Silberston, 1995), yet the associated issues date back to the formation of joint stock companies and stock markets. Today, corporate governance is a central political and economic topic, not only in well-developed market economies but also in emerging economies. However, there is still considerable debate as to what corporate governance actually entails, as the following selection of definitions will testify:
|• 'Corporate governance is an institutional arrangement by which suppliers of finance to corporations assure themselves of getting a proper return on their investment' (Shleifer and Vishny, 1997, p. 737).|
|• 'The purpose of corporate governance is to minimise the total cost in aligning managers' and shareholders' incentives, and in unavoidable self-interested managerial behaviours' (Jensen and Meckling, 1976). |