Handbook of Finance: Investment Management and Financial Management

Chapter 58. Corporate Governance

MARK J. P. ANSON, PhD, JD, CFA, CAIA, CPA

President and Executive Director of Nuveen Investment Services

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: Shareholders are the ultimate decision makers for any public company. After all, they own the company and can choose to do with it what they will. However, it is not practical for shareholders to make every day-to-day decision concerning the operations of the company. Consequently, shareholders delegate this authority to the managers of the company. The managers as agents are supposed to act in the best interests of their principals—the shareholders. However, problems may arise when the agents do not act in the best interest of their principals. The chief mechanism available to the shareholders for controlling and monitoring the actions of management is corporate governance.

Keywords: corporate governance, inside directors, outside directors, independent, directors, agent, principal, agency relationship, monitoring costs, bonding costs, residual loss, corporate internal control systems, board of directors, corporate government programs, shareowner, corporate governance rating, corporate governance score

Most public companies have widespread equity ownership. Shareholders tend to be scattered about the investor universe. As a result, monitoring the management of the company may not be easy. A single shareholder may be able to raise only a small voice. ...