Ownership and Control: Rethinking Corporate Governance for the Twenty-first Century.

• Author: Siegfried, John J.

In this provocative book Margaret Blair argues that because of limited shareholder liability, the maximization of corporate shareholder wealth does not insure the maximization of society's wealth. Because shareholders will declare bankruptcy and liquidate a firm when shareholder value turns negative even if the net present value of rents accruing to other investors outweighs the shareholders' losses, what is good for shareholders may not be good for society.

Other corporate investors with a stake in complete or partial liquidation decisions include employees, unsecured creditors, and suppliers who have made firm-specific investments. Some employees, for example, may develop valuable firm-specific skills that cannot be marketed elsewhere. In the absence of some assurance that the expected stream of positive rents earned on such investments will not be truncated against their will by corporate downsizing or bankruptcy, employees will underinvest in firm-specific skills, and wealth creation opportunities will be squandered.

Blair argues that shareholders are seldom the sole bearers of residual risk. In particular, when the total value of a company falls below the level where the value of shareholders' equity is zero, the value of creditors' claims begins to decline, and creditors become residual claimants.

The ability of corporations to maximize total wealth, argues Blair, depends on who has what ownership and control rights over corporate resources, who faces what incentives, who has what information, and how decisions get made. Corporate governance is about setting up the rules that answer these questions in corporations. Governance problems arise when decisions are made by parties who do not bear all of the consequences of the decisions they make.

Ironically, the vast separation of ownership from control in large modern corporations first identified by Adolph Berle and Gardiner Means in 1932, may promote the maximization of social welfare by insulating corporate management from the myopic pursuit of shareholder goals. Because shareholders face fixed costs of monitoring and controlling management behavior, and are tempted to free-ride on other shareholders, modern management hierarchies may be better able to balance claims for control from all the stakeholders. This, in turn, would induce more efficient investments from those stakeholders whose otherwise reduced control would have discouraged them from risking capital on investments whose...