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Theory and research on the relations among
top managers, company directors, investors,
and external contenders for corporate control –
broadly, the field of corporate governance –
experienced a remarkable flowering during
the 1990s. Early work addressed the central
puzzle raised by the widespread separation of
ownership and control among large American
corporations, namely, why would anysensible
person – much less thousands or millions of
them – invest their savings in businesses run
by unaccountable professional managers? As
Berle and Means (1932) framed the problem,
those who ran such ‘managerialist’ corporations
would pursue ‘prestige, power, or the
gratification of professional zeal’ (1932: 122)
in lieu of maximizing profits. Weak shareholders
could do little to stopthem. Yet generations
of individuals and financial institutions
continued to invest in these firms. Why?
Answering this question led to the creation
of a new theory of the firm that portrayed the
public corporation as a ‘nexus of contracts.’ In
the contractarian model, the managers of the
corporation were disciplined in their pursuit of
shareholder value by a phalanx of mechanisms,
fromthe way they were compensated,
to the composition of the board of directors, to
the external ‘market for corporate control.’
Taken together, these mechanisms worked to
vouchsafe shareholder interests even when
ownership was widely dispersed. Research in
this tradition flourished in the 1980s, as
takeovers of under-performing firms became
common and restive institutional investors
madetheir influence known. Studies focused
on assessing the effectiveness of devices such
as having boards numerically dominated by
outsiders, tying compensation to share price,
or ensuring susceptibility to outside takeover
(Walsh and Seward, 1990, provide a review).
Following the dictates of financial economics,
‘effectiveness’ was commonly measured via
stock market reactions to various actionsby
top management and/or the board. The results
of these studies provided proof of which
actions and structures promoted shareholder
value, and which promoted ‘managerial
entrenchment’ of the sort feared by Berle and
Means.
Corporate governance research during the
1990s expanded from a narrow focus on large
corporations to a broader concern with issues
of political economy. Thetransition of state
socialist societies to market economies, and
the spread of financial markets to emerging
economies around the globe, infused the
puzzle of managerialism with enormous policy
relevance. What mechanisms could be put in
place to inspire the confidence of investors in
businesses housed in distant and often unfamiliar
cultures? The place of financial markets
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Top Management,Company
Directors and Corporate Control
G E R A L D F . D A V I S and MICHAEL USEEM
Spetch11.qxd 5/18/2001 4:14 PM Page 233
in the project of globalization, as a means to
channel investment funds from wealthy
nations to emerging markets with limited local
capital, assured that corporate governance
would be a topic of intense interest for years
to come.
The decade of the 1990s saw threedevelopments
that moved the governance literature
beyond the simple assessment of mechanisms
in US firms. The first development was the
examination of the governance structure of
the firm – the set of devices that evolve within
the organization to guide managerial decisionmaking
– as an ensemble. Rather than regarding
any particular aspect of the firm’s structure
as essential, researchersbegan to study them
as complements or substitutes. Compensation
strongly tied to share price may act as a substitute
for a vigilant board, for instance, while
a vigilant board is not sufficient to make up for
a poorly integrated top management team.
Governance structures, in short, were configurations
of interdependent elements (Beatty and
Zajac, 1994; Anderson et al., 1998).
The second...
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