Archive for June, 2014

A case for Director Primacy: Meand and Ends in Corporate Governance, by Bainbridge. Against shareholder empowerment theories

The theory of the firm has been developed so that different models can be classified in a two axe table:

 –         Means axis: managerial models are placed at one side, (firm as a hierarchical organization, where directors are figureheads, and shareholders are out of the picture); at the other side, models where shareholders keep a privileged position, (as owners, or special production factors, to whom directors and managers owe fiduciary duties).

–         Ends axis: in one side models defending shareholder`s wealth as the firm goal, and in the other, those defending stakeholder theories.

 Shareholder primacy models somehow accept shareholders control the means and are the correct beneficiaries of director fiduciary duties. Managerial models differ as to what extent they (must) serve shareholders` interests, or all constituencies`s ones.

But Bainbridge suggests a new model, the director primacy (DP) model, (1). As to the means axis, he states that none side is correct; the board controls the firm`s resources. And this model support fiduciary duties are owed to shareholders. The model is based on the concept of the firm as a nexus of contracts.

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Who Should have a chair in the Boardroom: Advisory Directors (III)

On June 2011, Olubunmi Faleye, Rani Hoitash, and Udi Hoitash published an article in which they tried to assess whether the presence of advisory directors had an impact on the decision-making process, innovation, M&A decisions, and firm performance in general, (1) y (2).

The origin of their study is the fact that Corporate Governance, although connected to both “Monitoring and Advise”, is more often referred to as having to do with monitoring and oversight of managers. Regulation has also this focus, and careers are less affected by bad advise than by oversight failures.

Some CG writers have nonetheless noticed that such an excessive focus on monitoring damages the quality of advise, through a reduced trust on the Ceo, Holstrom (3), through the dislike of the Ceo, (Almeida, Adams and Ferreira, (4), or through worse acquisition and innovation practices, Faleye, Hoitash, and Hoitash, (5).

The authors try to understand if a board structure that allowed for some independent directors being deprived of monitoring functions and furnished with advising capabilities would enhance the firm performance. Apart from the reasons above, time availability could also add to this effect, the authors argue. Read more…