The Invention of Corporate Governance

The analysis of corporate governance begins with a central feature of modern capitalism—the separation of ownership and control in large corporations—first empirically documented by Berle and Means (1932). Such separation entails several agency problems reflecting conflicts between managers and shareholders, such as self-dealing by managers, low effort, consumption of perquisites, and excessive growth and diversification. Berle and Means saw self-dealing as the central agency problem and stressed the law as the fundamental mechanism of addressing it. Jensen and Meckling (1976) considered the consumption of perquisites and emphasized private mechanisms, such as financial incentives for managers, to counter wasteful perks. Jensen (1986) instead focused on excessive growth and diversification, which led him to count on leverage and takeovers. The combination of public corporate governance mechanisms, mostly the law, and market governance shaped both theory and practice.