Corporate Governance and the State

Pick up any first-year textbook in economics, and you will see that the analysis of pricing and other decisions by firms is based on the assumption that they maximize profits. More generally, when economists talk about the advantages of market economies – invisible hands and the like – they are implicitly assuming that managers maximize profits or shareholder wealth. Some 80 years ago, Berle and Means (1932) called this assumption into question by documenting the existence of a separation of ownership and control. Their main concern was that this separation of ownership from control would free managers to essentially rob the owners of the firm. The recent histories of firms like Enron, WorldCom, and Parmalat show that such fears remain well founded even today. The existence of a separation of ownership from control potentially gives rise to a host of principal/agent problems, which go beyond managers simply stealing from shareholders. I begin by discussing some of these as they manifest themselves in the private sector, turn after that to state-controlled companies, and end with a discussion of corporate governance problems in regulated industries.