CAZENEUVE Charline
Student ID : 0A20F368
1st year Exchange Student
 Article : « Corporate Governance : Some Theory and Implications », Olivier Hart,
The Economic Journal, Volume 105, Issue 430 (May 1995)
 Question 1 : According to the Article, describe the Framework for Corporate
Governance ?
The article explain that Corporate Governance issues are present in an
organisation and need two conditions. The first conditions is an agency problem, or
conflicts of interest, involving members of the organisation. The Second, transaction
costs are such that this agency problem cannot be dealt with trough a contract.
In the article it is explain why Corporate Governance does not matter in the
absence of Agency problems. In the absence of agency problems, all individuals
associated with an organisation can be instructed to maximise profit or net market value
or to minimise costs.
Then, it is also explain that agency problems alone do not provide a rationale for
Corporate Governance. Governance structure matters when some actions have to be
decided in the futur that have not been specified in an initial contract.
According to the article, Governance structure does matter if Agency Problems are
present and contracts are incomplete. In a world of incomplete contracts, where agency
problems are also present, governance structure does have a role. This structure can be
seen as a mechanism for making decisons that have not been specified in the initial
contract. A second form of goverance structure is joint ownership.
Corporate Governance can be an issue even in a small firm. However, it is usally
thought to be a much more singnificant issue in big companies.
 Question 2 : According to the Article, what are the mechanisms for controlling
management ?
According to the article, the first mechanisms for controlling management is the
« Boards of Directors ». One check on management is provided by the board of directors.
Shareholders elect the board to act on their behalf, and discuss about major decisions. In
extreme cases the board may replace the company’s chief executive and other members
of the management team. In principle, the board has a very important role to play, but in
practice there are some reasons to doubt about its effectiveness. In a board, there is
executive directors, who are members of the management team, and nonexecutive
directors, who are outsiders. Several problems exists between this two type of directors.
For example, the executive directors have a significant financial interest in the company,
when the nonexecutive directors are busy people and probably have little time to think
about the company’s affairs. To solving problems of boards, the article explain it would
be a good idea to change the structure of the board. For example, it is recommended that
the chairman of the board should be independant. Suggestions in this article are not
enough to solve completely all problems in board.
An other mechanisms for controlling management according to the article is
« Proxy fights ». If the performance of board members is sufficiently bad, shareholders
can always replace them. The standard way this is done is through proxy fight : a
dissident shareholder puts up a slate of candidates to stand against management’s slate
and tries to persuades other shareholders to for his or her candidates. Proxy fights may
not be very powerful tool for disciplinning directors in a company with dispersed
sharholders.
The third mechanisms in the article is « Large sharholders ». It is explain that one
way to improve Coporate Governance is to ensure that a company has one or more
large sharholders. For example, if a company has a 100% shareholder there is no longer
separation between ownership and control. Own 100% of a company for only one
shareholder would create several problems. This large sharholder may use his power to
improve his own position at the expense of other sharholders. He might persuade
management to divert profit to himself, for example by selling goods to a company the
shareholder owns at a high price. To improve Corporate Governance, company has to
make sure having more than one large shareholder.
The fourth mechanisms for controlling management in the article is about « Hostile
Takeovers ». It’s explain that a hostile takeover is in principle a much more powerful
mechanism for disciplining management since it allows someone who identifies an
underperforming company to obtain a large reward.
The last one mechanisms in the article is about the « Financial Structure ». The
article explain that all the mechanisms discussed before all involve monitoring or voting
by shareholders or their representatives. But another important source of discipline on
managers is provided by corporate financial structure.