The shareholder value model

Andrew Johnston

doi:10.1017/CBO9780511770753.002

2 - The shareholder value model

from PART 1 - Theories of corporate governance

Published online by Cambridge University Press: 04 August 2010

Andrew Johnston

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Andrew Johnston: Affiliation:
University of Queensland

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Summary

Introduction

The agency model makes the clear normative demand that corporate managers should maximise shareholder value, as expressed in the current share price, on the basis that by doing so they maximise the wealth of society. In line with this, it defines corporate governance narrowly, to refer to those legal (and other) mechanisms which constrain managerial discretion and require the pursuit of shareholder value. Anything which reduces accountability of managers to shareholders (or increases accountability of managers to other groups, which amounts to the same thing) is deemed inefficient. It is difficult to overstate the influence that the agency model has had on debate about corporate governance in the United States and the United Kingdom. However, its reception in continental Europe has been much more mixed, and although it has had a growing influence in debates about the orientation of regulation at the European level, its demands are not yet met by any positive, binding supranational instruments.

Contractual analysis of companies

All economic analysis of corporate governance proceeds on the basis of a deconstruction of the company as a legal entity to reveal a ‘nexus of contracts’ between the suppliers of the various factors of production. Although the agency model is the best known, there are a number of variants on this basic theme, which differ in their analysis of the contracts that make up the nexus, and in particular, the extent to which those contracts are assumed to be fully contingent or ‘complete’.

Type: Chapter
Information: EC Regulation of Corporate Governance , pp. 21 - 58

DOI: https://doi.org/10.1017/CBO9780511770753.002 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2009

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