The Economics of Corporate Governance

Dimensional’s recent paper “The Economics of Corporate Governance” provides a concise overview of the corporate governance literature. We focus on the governance of for-proft, publicly traded corporations and address two important questions. First, for whom should such corporations be run, shareholders or stakeholders? Second, what is the impact of governance provisions on shareholder value?

We ground our analysis in the agency view of the corporation, which emphasizes the costs and benefts of delegated power. Under the agency view, a key concern is that directors and executives might use their discretion to advance their own interests at the expense of the constituencies they serve. Corporate governance is thus faced with a fundamental tension between the need to grant directors and executives suffcient discretion to fulfll their duties and the need to establish guardrails to deter possible opportunistic behavior. This tension is central to the two questions we address.

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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.