DP2086 Corporate Governance

Author(s):	Jean Tirole
Publication Date:	February 1999
Keyword(s):	control rights, Governance, Managerial Incentives, shareholder value, stakeholder society
JEL(s):	D23, G32
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2086

The paper first develops an economic analysis of the concept of shareholder value, describes its approach and discusses some open questions. It emphasizes the relationship between pledgeable income, monitoring and control rights using a unifying and simple framework. The paper then provides a first and preliminary analysis of the concept of the stakeholder society. It investigates whether the managerial incentives and the control structure described in the first part can be modified so as to promote the stakeholder society. It is shown that the implementation of the stakeholder society strikes three rocks: dearth of pledgeable income, deadlocks in decision-making, and lack of clear mission for management. While it fares better on those three grounds, shareholder value generates biased decision-making; the paper analyzes the costs and benefits of various methods of protecting noncontrolling stakeholders: covenants, exit options, flat claims, enlarged fiduciary duty.