The Shareholder Value Model (the Standard view in Corporate
Governance): How do suppliers of finance to corporations assure
themselves of getting a return on their investments?
 Outsider-Insider model (The Anglo-Saxon vis-à-vis the Continental
model): Ownership is dispersed among a large number of investors,
who rely on legal protection (the outsider system); reliance on large
investors and banks (the insider system).
 The Market for Corporate Control (crucial in the Anglo-Saxon
model): The acquisition of a target firm implies that control rights are
transferred to the board of the acquiring firm (the managerial
competition model).
 Gugler: Discriminates between the two dimensions (cash-flow and
control rights) of ownership
 The Contractual approach: Protection through private
arrangements (a firm is regarded as a nexus of contracts, contracts
are imperfect)
 The Legal approach: Protection of outside investors is based on
legal rules and regulations.
The prime aim:
 make you acquainted to the criticism of the shareholder model in
corporate governance
 prepare you to alternative views of corporate control discussed in the
third section.
Objections against the shareholder value perspective
1. US and UK worldview (“outsider model”), while most firms in the
world have one dominant blockholder
2. EU concerns about an efficient and competitive business enterprise
3. Interests of non-investing parties should be better represented
4. The nature of the firm has changed
Corporate Control
Control
Residual
Ownership Residual rights
through
control
(cash-flow
to control given
debt
moves to
rights)
to:
management assigned
to:
Modern
Yes
Yes
Investors
Investors
Corporation
New
Disfavoured Moves away
Enterprise
from top
Investors or Third parties,
employees
managers
external
investors or
employees
(German
codetermination)
Tirole´s Stakeholder model:
1. Contractual perspective on firms
2. Incentive systems to discipline managements
3. Shared or undivided control?
Implicit incentives: stem from an economic agent’s desire to signal
characteristics to his or her labour market.
 The “labour market”: all those people, who take actions that
impact on the agent’s benefits
 These actions reflect people’s beliefs about the characteristics
of the agent.
Partnership
 the general partners both own and exercise management
 the partners cannot sell or otherwise transfer their ownership claims
without permission of the other partners
 there are no markets for corporate control connected to the
partnership form
 when borrowing money each partner is individually responsible for
the entire liabilities (“passiver”) and the liability is unlimited
Advantages of partnership
 the costs of monitoring are low. Unlimited liability encourages the
partners to efficiently monitoring the business operations.
 in service businesses only the employees themselves have the
qualifications and information necessary to manage specialized
knowledge assets (tacit knowledge embedded in people)
 human capital often not tradable (limitations on intellectual
property)
Solution to the problem with costs of collective decision-making:
 Undivided control is combined with contractual protections for the
non-controlling parties:
1. limitations on actions that are expected to create strong
externalities for other stakeholders.
2. exit options (workers, who become unemployed when a
company closes down, have right to general training,
retirement etc.)