This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

A Survey of Corporate Governance

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor

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It is commonly thought that a widely held corporation that is not being run in the interest of its shareholders will be vulnerable to a takeover bid. We show that this is false, since shareholders can free ride on the raider's improvement of the corporation, thereby seriously limiting the raider's profit. We analyze exclusionary devices that can be built into the corporate charter to overcome this free-rider problem. We study privately and socially optimal corporate charters under the alternative assumptions of competition and monopoly in the market for corporate control.

Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation

This book provides a detailed account of how structural flaws in corporate governance have enabled managers to influence their own pay and produced widespread distortions in pay arrangements. The book also examines how these flaws and distortions can best be addressed. Part I of the book (titled The Official View and its Limits) critically examines the arm's length contracting view, which underlies much of the academic research on executive compensation as well as the law's approach to it. We show that boards have not been operating at arm's length from the executives whose pay they set. While recent reforms can improve matters, they cannot be expected to eliminate significant deviations from arm's length contracting. We also show that the constraints imposed by market forces and shareholders' power to intervene are not tight enough to prevent such deviations. Part II of the book (titled Power and Pay) shows how an understanding of the role of managerial power can help explain executive compensation practices. We provide a framework for assessing whether pay arrangements are a product of managerial influence. We discuss managers' interest in camouflaging the amount and the performance-insensitivity of their pay. Applying our framework, we discuss how managerial influence can help explain, among other things, the evidence on the relationship between managerial pay and managerial power; the use of retirement benefits and other compensation arrangements to provide stealth compensation; and the ability of departing managers to obtain more than their contractual entitlement. Part III of the book (titled Decoupling Pay from Performance) examines how managerial influence has operated to reduce the performance-sensitivity of executive pay. Among other things, we examine the structure of non-equity compensation, the design of conventional option plans, the use of restricted stock grants, and managers' freedom to unload options and shares. Part IV of the book (titled Going Forward) discusses how executive compensation - and corporate governance more generally - can be improved. We examine the extent to which pay arrangements can be improved by adopting board process rules, imposing shareholder approval requirements, and making pay more transparent. We conclude that problems with compensation arrangements cannot be fully addressed without ensuring that directors focus on shareholder interests and operate at arm's length from the executives whose compensation they set. To achieve this result, we argue, it is not sufficient to make directors independent of executives as recent reforms has sought to do; it is also necessary to make directors dependent on shareholders by changing the legal arrangements that insulate boards from shareholders.

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Pay without Performance: The Unfulfilled Promise of Executive Compensation

Boards of Directors: A Review and Research Agenda:

The Independent Director: Heavenly City or Potemkin Village?

Insiders, Outsiders, and Informational Advantages under the Federal Securities Laws

Apparently overruling earlier decisions, the Supreme Court of Delaware has recently declared that a merger effected "for the sole purpose of freezing out minority stockholders . . . is an abuse of the corporate process . . . [and a] violation of a fiduciary duty for which the Court may grant ... relief."' In Singer v. Magnavox Co.,2 a parent corporation had merged with its eighty-four-percent-owned subsidiary. Minority stockholders of the subsidiary had received only cash for their shares and thus had been eliminated from participation in the combined enterprise. The court confirmed that the parent owed a fiduciary duty to the minority by reason of its status as majority stockholder, but then-in what is generally viewed as a new development in Delaware law-the court held that this duty would not be met unless a corporate purpose for the merger, other than mere elimination of the minorityheld stock, were supported by the evidence. In Tanzer v. International General Industries, Inc.,3 decided a few weeks after Singer, the court resolved the question of whose corporate purpose was relevant in parent-subsidiary mergers by holding that a merger that conveyed an economic benefit to the parent corporation sufficed to meet the standard of fiduciary conduct erected in Singer, provided that the transaction was otherwise "entirely fair" to the minority stockholders of the subsidiary. In effect, the displacement of a subsidiary's public stockholders was held to be lawful under the Delaware statute if, but only if, a commercial benefit could be demon-

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A Restatement of Corporate Freezeouts

I. TRANSACTIONS INVOLVING DISTRIBUTIONS OR ONLY INTERNAL REARRANGEMENTS OF PARTICIPANTS .......... 1076 A4. Dividend Distributions ................................. 1076 A. Liquidating Distributions and Going Private ........... 1078 1. Liquidating Distributions .......................... 1079 a. Entitlement to Equal Treatment ................ 1079 Z Distributions which produce losses/or minority shareholders ....................... 1080 ii. Distributions which apparently leave minority shareholders no worse off ................... 1082 b. Implementing the Requirement of Equal Treatment ..................................... 1090 .2. Going Private ..................................... 1091 C. Parent-Subsidiary Mergers ............................ 1098 L Entitlement to Equal Distribution .................. 1099 2. Implementing the Requirement of Equal Treatm ent ......................................... 1102 D. Corporate Purchase of Its Own Shares ................ 1106 E. Summary ............................................. 1114 II. THIRD PARTY TRANSACTIONS ............................. 1115 A. Arm's-length Mergers ................................. 1115 L Mergers After Negotiated Sales by Controllers ..... 1115 2 Two-step Takeovers ............................... 1118 B. Sales of Control ...................................... 1122

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Equal Treatment of Shareholders in Corporate Distributions and Reorganizations

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Victor Brudney

Papers

The Independent Director: Heavenly City or Potemkin Village?

Insiders, Outsiders, and Informational Advantages under the Federal Securities Laws

A Restatement of Corporate Freezeouts

Equal Treatment of Shareholders in Corporate Distributions and Reorganizations

Fair Shares in Corporate Mergers and Takeovers