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Essay on Microeconomics
Corporate Management: An Introduction
An economic view of corporate governance begins with recognition that the demand for such governance follows not only from the separation of ownership and control, but also from consideration of capital structure, production methods, employment procedures and investment opportunity sets. Conflicts of interest, which arise between the various stakeholders in large corporations, have been discussed for hundreds of years, at least since the writings of Adam Smith. While these conflicts of interest are often described as agency costs (Jensen and Meckling 1976), modern agency theory, like stewardship theory, does not focus on conflict over the distribution of income between owners and managers. Instead, agency theory asks what set of governance rules will enhance efficiency and thus maximize wealth.
A simplistic perspective on the separation of ownership and control is superficially appealing, leading as it does to suggestions for “improved” or even “necessary” corporate governance attributes. Such attributes are justified as reducing the apparent conflicts of interest between widely dispersed shareholders and professional (non-owner) managers. But financial economists recognize that affected parties have incentive to search for efficient solutions to conflicts of interest, thereby reducing (or even eliminating) the need for mandated attributes of corporate governance.
More notably, these “affected parties” extend beyond shareholders and professional managers to incorporate employees, creditors and suppliers. By way of supposed contrast, in Donaldson and Davis’ view of stewardship theory “the executive manager, far from being an opportunistic shirker, essentially wants to do a good job, to be a good steward of the corporate assets” (1991, p.51). The distinction between stewardship and agency theory is not clear because every manager, like every person, will want to do a good job within the confines of the incentives, essentially property rights, facing him or her........
