Corporate Governance: Incentives And Control

In this paper, the auther deals with the issues of corporate governance, that is, the issues of incentives and controls in corporate governance. Conflicts of interests are inherently rooted in modern corporation in the relationship between shareholders as principles and managers as agents, which cannot be easily solved through complete contracts by the parties due to the presence of informational incompleteness. This is where the issues of corporate governance come from. Broaderly speaking, the issues of corporate governance cover the so-called non-classical issues of corporate governance concerning addressing the conflicts between large shareholder(s) and manager(s), as well as the so-called classical issues of corporate governance concerning addressing the conflicts between large shareholder(s) and minority (or dispersed) sharehlders, which has been extensively studied by authers in the fields of law and financial economics. The way that can effectively alleviate the fundamental problems in corporate governance is the design of some incentive and control mechanisms, maximizing shareholders' utility.Adam Smith may be the first economists who noticed and worried about the interest conflicts in modern corporation. And Berle and Means were surely among the pioneers who explicitly pointed to the principle-agent problems in corporate governance. But the terminology "corporate governance" had not come to public untill the early 1970's. The research on corporate governance has eventually become a worldwide phenomenon and reached its climax since a series of major historical events such as the privatization movements bursted in the early 1990's, the Asian financial crisises broken out in the middel and late 1990's, and the corporate scandals brought to light in the early new millennium. Although started just in the late 1990's, China has seen a tremendous increase in the literature on corporate governance which is now merging into the sea of international corporate governance research.Chapter One spells out the research background, the structural design, the methodological basis,and the major conclusions.In Chapter Two, the auther looks at the issues and modes of corporate governance, and in Chapter Three, the five typical mechanims addressing the corporate governance problems are discussed in detail, including ownership structure,board ofdirectors,managerial compensation,financial structure,and hostile takeovers, all being proposed and supposed to help solve the classical corporate governance problems, after briefing the development of research on corporate governance both at national and international level.In Chapter Four, a model is developed which integrates the classical and non-classical corporate governance issues in a general framework. Our model considers ownership structure or ownership concentration as a major and representative corporate governance mechanism. Our conclusion is that ownership concentration and legal environment (measured by the quality of legal shareholder protection) are no less than the incentives and controls in corporate governance. In other words, incentives and controls in corporate governance take internally the form of ownership concentration and externally of legal shareholder protection. Unless the legal shareholder protection is much better in quality, ownership concentration would not necessarily decrease in the quality of shareholder protection. In situation where legal environment is in minimum favor of minority shareholders, a higher ownership concentration would do well in terms of alleviating both the classical and non-classical corporate governance problems.Chapter 5 is an quantitative analysis of Chinese corporate governance under the extablished framework. The points are that Chinese corporate governance is an adaption to and an optimal choice under the existing legal environment. Moreover, a gradually improved legal environment departing from its current much lower level would not necessarily lead to a reduction in corporate ownership concentration, addressing the presence o...