Monday, March 30, 2009

Stakeholder Governance: A Bad Idea Getting Worse by George Dent

Every corporate course starts out with a discussion of the the Nexus of Contracts and why it is that shareholder based models are superior to any other model (Short explanation: as residual claimants they are on the sloped section of the payoff graph and thus have best incentives to monitor).

The following article by George Dent reiterates this and reminds us (and US) that investment can go elsewhere.

SSRN-Stakeholder Governance: A Bad Idea Getting Worse by George Dent:

From the abstract:
"The traditional objections to stakeholder governance remain valid: the interests of stakeholder groups clash not only with those of the shareholders but also with each other, and acceptable means for choosing representatives of stakeholders other than employees have not been discovered. Stakeholder governance would impair economic efficiency: maximization of shareholder wealth remains the best proxy for maximizing the benefits of private enterprise to society. Beyond the traditional problems with stakeholder governance, economic developments make it an even worse idea. Capital has become more mobile, and the U.S. is no longer so dominant a venue for investment; many countries (notably China and India) have now entered the competition for capital, and corporate governance in many countries now treats investors better than the U.S. does. Instituting a serious stakeholder role in corporate governance now would send capital fleeing abroad, with great resulting damage to the American economy."
For clarification: stakeholder governance is that which gives stakeholders other than shareholders an active role on boards. For a more rigorous defense of shareholder based governance see Tirole 2001.

Cite: Dent, George W.,Stakeholder Governance: A Bad Idea Getting Worse(March 2009). Case Western Reserve Law Review, Vol. 48, 2009; Case Legal Studies Research Paper No. 09-9. Available at SSRN:

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