A summary of incentive mechanisms or institutions

Table: A summary of incentive mechanisms or institutions

The institutions listed below could potentially reduce the managerial transaction costs. They are often imperfect because they may be incapable of completely removing the managerial transaction costs.

Go to figure explaining the main issues of the managerial agency problem.

Go to figure illustrating some hypotheses of relevance for corporate governance

Decision systems

Decision systems are defined as the systems by which corporate decisions are distributed between, e.g., the general assemble, the board of directors, and the management. It also covers issues in the corporate charter of relevance for the distribution of control, such as the existence of staggered boards and stocks with differential voting rights. Classic references on decision systems are Fama and Jensen [1983a, 1983b]. More information.

Performance monitoring systems

Performance monitoring systems are defined as the systems that make it possible for the firm's constituencies to gather and analyze information about the firm. Prominent examples are the corporate disclosure rules and the discounted cash flow approach used to estimate fundamental corporate value. Classic references on performance monitoring systems are Jensen and Meckling [1976], and Copeland, Koller and Murrin [1996]. More information.

Remuneration systems

Remuneration systems or incentive based compensation systems are defined as the systems that regulate the pecuniary compensation of managers for their ‘sale’ of management services. It should be noted that this definition excludes managerial income stemming from equity ownership. Classic references on incentive based compensation systems are Hart and Holmström [1987, part 1]. More information.

Bankruptcy system

Bankruptcy systems are defined by the bankruptcy procedures, for instance, those that specify the transfer of corporate control from stockholders to creditors when a firm goes bankrupt. A reference on bankruptcy systems is Smith and Warner [1979]. More information.

Ownership structures

The ownership structure is defined by the distribution of equity with regard to votes and capital but also by the identity of the equity owners. Two classic reference on ownership structures are Jensen and Meckling [1976] and Holderness, Kroszner and Sheehan [1999]. More information.

Creditor structures

The creditor structure is defined by the distribution of debt and by the identity of the creditors. Two references on creditor structures are Berle [1926], and Stiglitz [1985]. More information.

Capital structures

The capital structure is defined by the firm’s policy with regard to leverage and dividend payments. A classic reference on capital structures is Jensen [1986]. More information.

The market for corporate control

The market for corporate control is defined as equity transactions that are large enough to change corporate control. Two classic references on the market for corporate control are Manne [1965] and Marris [1964]. More information.

The market for management services

The market for management services is simply defined as the market for managerial labor. A classic reference on the market for management services is Fama [1980b]. More information.

Product market competition

There are two kinds of product market competition that are relevant in corporate governance: 1) competition in the firm's product markets, 2) competition in the product markets of the firm’s owners, if they are firms as well, e.g., the product markets of an institutional investor. A classic reference on product market competition is Hart [1983]. More information.