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A Review of Corporate Governance Theory

The ideological origin of corporate governance theory can be traced back to Adam Smith's discussion of agency problems in The Wealth of Nations more than 200 years ago, in which he argued that a series of problems arose due to the separation of ownership and management in the joint-stock company, and that a set of effective systems should be set up to solve the conflict of interest between owners and operators. A pioneering study by Berle and Means in 1932 has become a pioneering work in the literature of corporate governance theory. Based on the analysis of a large amount of empirical materials, they found that the ownership and control of modern companies have been separated, and the control has been transferred from the hands of the owners to the hands of the managers, and the managers of the companies often seek to maximize their personal interests rather than the interests of the shareholders, and therefore should emphasize the interests of the shareholders, to achieve the supervision and control of shareholders over operators. Therefore, the interests of shareholders should be emphasized, and the supervision and checks and balances between shareholders and managers should be realized. Since then, especially after the 1980s, the issue of corporate governance has received more and more attention from the theoretical community. In the process of development of corporate governance theory, two representative governance theories have emerged, namely, unilateral governance based on "the supremacy of shareholders' interests" and ****same governance centered on "stakeholders".

The unilateral governance theory based on the supremacy of shareholders' interests

The unilateral governance theory based on the supremacy of shareholders' interests holds that an enterprise is a shareholder's enterprise, and shareholders own all the ownership rights of the enterprise, and the purpose of the enterprise is to maximize the interests of shareholders, thus advocating that "capital" and "hired labor", i.e., material capital, are the most important elements of the governance theory. Thus, it advocates the stability and rationality of "capital and labor for hire", i.e., the governance mode dominated by material capital. Its representatives mainly include Shleifer, Vishny and Tirole. For example, Shleifer and Vishny believe that the problem of corporate governance is how to ensure that the suppliers of capital to the company can get a return on their investment; Tirole believes that the standard of corporate governance is defined as the protection of shareholders' interests. The theoretical basis for unilateral governance is the modern theory of the firm and the principal-agent theory. The theory of the firm pioneered by Coase answered the question of why firms must operate in accordance with the goal of maximizing shareholders' interests, for example: Alchian and Demsetz had explained the optimal form of contract in terms of supervisory differentials in team production by the fact that the supervisors own the residual claims of classical firms, thus providing evidence that the capitalists get the profits of the firms; Grossman, Hart and Moore et al. had explained the optimal form of contract in terms of asset specialization by the fact that the capitalists get the profits of the firms. Moore et al. demonstrate that the proprietary and unprovable nature of physical capital makes it desirable for the owner of physical capital to take ownership of the firm (i.e., residual control) from the perspectives of asset specialization and incomplete contracting; and Jensen and Meckling, Fama, and Jensen et al. demonstrate that firms are owned and operated for the maximum benefit of shareholders, from the perspectives of agency costs, risk-sharing, and decision-making process, respectively. The rationality of the enterprise owned by shareholders and operated to maximize the interests of shareholders. It can be seen that the maturity and perfection of enterprise theory provides the strongest theoretical support for the view that shareholders' interests are paramount. The principal-agent theory provides theoretical support for the construction of corporate governance, which focuses on how the principal designs incentive-restraint mechanisms to make the agent work hard.

To the question of why only shareholders have the right of corporate governance, that is, the source of power in corporate governance, there are two main theoretical schools of thought in the unilateral governance theory of "the supremacy of shareholders' interests": the theory of the residual right of claim; and the theory of the residual right of control. The theory of "residual claim" believes that whoever bears the residual claim, bears the residual risk, and thus has the power to govern the company, and believes that the owner is the natural owner of the residual claim, and the motivation of possessing the surplus prompts the owner to care about the production and operation of the enterprise. The owner seeks to maximize the surplus, while the operator seeks to optimize his own compensation, in the case of a given enterprise's earnings, the mutual erosion of the interests of the two makes the owner to create the need for governance of the operator to protect his own interests. The theory of "residual claim" can be directly traced back to Say, the originator of French vulgar political economy in the late 18th century. According to Say, labor,

capital and land are the three factors of commodity production, which are the source of its value, and the owner of each factor of production should get the income created by each of them, i.e., the worker gets the wage, the capitalist gets the interest1, and the land owner gets the rent. If the behavior of the parties and the output of the enterprise are measurable, the contribution of each factor owner can be based on the income that these parties should receive, so that the enterprise production allocation efficiency is optimal, Pareto optimal distributional equilibrium is achieved. However, due to information asymmetry, the main feature of the real world is that the subject's behavior is unpredictable, the output is unpredictable, or both are unpredictable, and it is impossible for people to accurately determine all the possible future states of the enterprise as well as the contribution of each factor owner under each state, so that the allocation cannot be made in accordance with the contribution of the factors, and the optimal Pareto equilibrium of distribution cannot be realized. According to the theory of "residual claims", in this case, it is necessary to let a certain type or several types of people to bear the residual claims, and the efficiency brought about by different people is not the same, the enterprise property rights arrangement and output efficiency and the higher solvency of the material capital and other reasons determine that the provider of capital has the possibility of taking the surplus of the enterprise. Specifically to corporate governance, is that only shareholders can become the main body of corporate governance.

But the theory of "residual claim" to guide corporate governance is flawed, mainly in the following three aspects:

(1) "residual claim" itself is not a good concept. In Jensen and Meckling's framework of contractual analysis, they use residual claim to define enterprise ownership and investor power, which refers to the right to claim the balance of the enterprise's income after deducting all fixed contractual expenditures (e.g., costs, fixed wages, interest, etc.)[3]. However, residual income is often shared among many parties, especially in the context of the New Economy, where not only investors, but also other people, such as managers and even ordinary employees, participate in the distribution of residual income, and thus also have the right to claim residual income. This makes it unclear who is the residual claimant in many cases. For example, if both parties receive a change in income, we cannot say that one party is the residual income claimant of the other party. In fact, Hart criticized the concept of residual claimant, so he turned to residual control to define the investor's power.

(2) There is also a major problem in applying the theory of residual claims, which is a distributional theory, to the theory of corporate governance. The attributes of the distributional theory of residual claims make its research scope narrow, it can only include the enterprise income distributors in the scope of the study, and exclude those who do not participate in the distribution but may participate in corporate governance, such as the government or the deposit insurance institution that bears the business risk of commercial banks, they are only the outsiders of the business activities of the commercial banks, and do not participate in the distribution of enterprise income but participate in the governance of the commercial banks. Governance.

(3) Obviously, the theory of "residual claim" does not take whether to obtain the residual income as the criterion to judge whether to have the residual claim, because the reality is not only the shareholders to obtain the residual income, so how to judge who has the residual claim? The theory does not answer this question.

The theory of "residual claim" does not put forward a method of how to judge who has residual claim in reality, but only has an a priori assumption that shareholders should obtain residual claim innately, so that the theory can't be tested from the reality, which is one of the biggest theoretical shortcomings of the theory. To sum up, the shortcomings of the theory of "residual claim right" make the use of it to guide the practice of corporate governance is facing some problems, for example, if only rely on the shareholders of commercial banks with a relatively small proportion of their own capital to control the governance of the commercial banks that have a significant impact on a country's economy, it is unfair and unreasonable, and the consequences of this are also extremely serious. The consequences would be extremely serious. However, the "residual claims" theory is correct in that it is the shareholders who bear the residual income and hence the risk that gives rise to the governance requirement. Under full contractual conditions, there is no residual control because all rights are defined by contract and have a subject. The theory of "residual control" holds that it is precisely because the contract is incomplete that it is impossible to make detailed and feasible provisions for all contingencies and their countermeasures in the initial contract, which requires someone to have the "residual control" so that in the case of contingencies that are not stipulated in the initial contract, there is no residual control. This requires someone to have "residual control" in order to make decisions in the event of contingencies that are not provided for in the initial contract. How can these various control rights be effectively allocated between outside investors and managers? The theory is that such power is naturally vested in non-human capital owners, and that ownership of physical capital is the source of such power. Under the guidance of this theory, it is reasonable to regard shareholders as the main body of corporate governance.

However, this theory, like the theory of "residual claim", also has many problems, which are manifested in the following aspects:

(1) The premise of the theory of "residual control" is the theory of incomplete contract, but the contract is incomplete to what extent? To what extent is the contract incomplete? Many scholars have questioned this. Hart et al. believe that the incompleteness of the contract is mainly due to the third-party unprovability of the relevant variables, but Tirole y realized that the real concern of the parties to the contract is not the specific contingent event itself, but the effect of contingent events on the payment, and only when the two kinds of contingent events on the payment of the impact of the two kinds of contingent events can not be differentiated, will affect the contract's completeness, thus weakening the contract. Completeness, thus weakening the basis of incomplete contract theory. Game theory also proves that the influence of the unprovability of the relevant variables of the contract on the behavior of the parties is weakened when the game is repeated many times instead of a static game. Therefore, it is meaningless to talk about the incompleteness of the contract in the absolute sense in the abstract, and the theory of residual control does not have a solid theoretical foundation[4].

(2) The concept of "residual right of control" is also problematic, and its connotation and extension are very vague. Originally, "residual control" means "the power to determine the use of all assets in any manner not inconsistent with prior contracts, practices or laws"[5], but, in reality, many of the powers of governance have been stipulated in the contract, so in many literature, the residual control of the assets of the company. A lot of literature, residual control and control is often mixed, even Hart and Moore themselves have to admit that "in fact, we do not distinguish between contractual control and residual control, and in fact, residual control is equivalent to full control".

(3) Like the theory of "residual claim", the theory of "residual control" of the "strong view of capital" is only an a priori assumption, and its existence and scope of application have never been seriously examined. Its conditions of existence and scope of application have never been seriously examined. The theory considers the ownership of physical capital as the source of such power, but cannot answer why the ownership of human capital cannot bring such power. Moreover, many scholars have realized the meaninglessness of "residual control" in the abstract sense, and have turned to the study of the actual control of corporate resources by agents with information and knowledge advantages, such as Aghion and Tirole, who believe that a clear line should be drawn between nominal and actual control.

(4) The theory of "residual control" is characterized by a contradiction in internal logic. In the model of Grossman and Hart[6], investors naturally have residual control, but this is based on the condition that the parties are not constrained by wealth. Once this unrealistic assumption is abandoned, the natural residual control of investors can be transferred to assetless entrepreneurs, for example, Aghion and Bolton concluded that "control is transferred by camera", that entrepreneurs should gain control when the business is in good condition, and vice versa, and that investors should gain control. 7]. This in fact has rejected the traditional concept of "shareholder supremacy" unilateral governance structure.

(5) The concept of "control" is inconsistent with the concept of "governance". The concept of "control" includes not only the power of governance but also the power of management, and the study of the unification of the two will not lead to any meaningful conclusions on governance, and the final conclusion can only be that the distribution of "control" in the enterprise in the plurality of the distribution of "control", that is, multiple parties occupy "Control". It can be seen that there are still many problems to be solved in the theory of "residual control", but it thinks that shareholders are the last risk bearers, they should be given the power to control the risk of knocking, this kind of thinking is worthy of affirmation. The germ of stakeholder theory began with Dodd, but it became an independent branch of theory thanks to Freeman's pioneering research. Unlike the traditional "shareholder supremacy" theory, the "stakeholder" theory of governance believes that the company is a responsible body, to a certain extent, must also assume social responsibility, the pursuit of enterprises can not be limited to maximizing shareholder interests, but also to consider its social value aspects. It is also necessary to consider its social value. The development of any enterprise cannot be separated from the input or participation of various stakeholders, when these stakeholders injected a certain amount of specialized investment in the enterprise, they either share a certain amount of business risks, or pay the price for the enterprise's business activities, they should participate in the governance and share the control of the company and the residual right to claim. The representative figures of stakeholder theory are B lair, Porter and so on.

There are many schools of thought in the development of the "stakeholder" theory, but all of them believe that the position of stakeholders should be taken into account in corporate governance. The "specialized investment" theory is one of the most important power viewpoints of "stakeholder" theory, and the representative viewpoints are as follows: Freeman and Evan believe that since stakeholders also invest in specialized assets, their interests should be considered; Blair believes in the specialization of human capital, which is the most important factor in the development of "stakeholder" theory. Blair, from the perspective of human capital specialization, points out that stakeholders have invested in specialized assets in the firm and thus bear the residual risk of the firm, so they should enjoy the corresponding residual rights, that is to say, they should participate in the governance of the firm; Rajan and Zingales believe that the firm is the linkage of the specialized investment that the market can not fully replicate, and whoever masters this kind of specialized investment that determines the quasi-rental production of the firm, will have the right to participate in the corporate governance. Whoever masters this specialized investment that determines the quasi-rent production of the firm will gain authority. It can be seen that, unlike Coase's attribution of authority to the firm as exogenous, and Alchin and Demsetz's attribution of authority to the need for supervision in team production, the theory of "earmarking" attributes authority to earmarked investment.

The "stakeholder "*** theory of governance, which focuses on the interests of stakeholders (especially owners of human capital) and seeks to improve corporate governance structures, should be fully recognized. This theory may point out the direction of the evolution of corporate governance structure, and to a certain extent, it also guides the improvement of corporate governance structure in reality, which has important theoretical and practical significance. However, the theory of "stakeholder"

(1) It is difficult to define the stakeholders. The stakeholders of an enterprise can be infinitely extended to all people, but, obviously, we can't take all people as the main body of enterprise governance. Even if the stakeholders are categorized in detail according to the differences in the degree of interest and the form of interest, they cannot be defined. A very simple example is that the government may be more interested in a certain company than an individual who owns a number of shares in that company, because the amount of tax paid by the company to the government far exceeds that person's investment in the company, can we say that the government has more power to participate in the governance of the company than that person?

(2) Conflicts of interest between stakeholders may increase transaction costs. Even if it is possible to identify the subjects that have an interest in the company, then surely it will not be a small number. If they all participate in corporate governance, the conflict of interest between stakeholders makes the organizational cost of the governance structure may be very large, which is difficult to ensure that the operation of the company to bring greater benefits to the stakeholders.

(3) Stakeholders' interests can be protected by more comprehensive contracts than those of shareholders. The theory of "specialized investment" suggests that each stakeholder contributes a specialized asset to the company, but for the vast majority of stakeholders, this specialization is weak compared to its generality, and insignificant compared to the specialization of the assets invested by shareholders. Therefore, this is not a sufficient basis for stakeholder participation in corporate governance. Moreover, although stakeholders bear the risks of the company, they can either be compensated for the risks they bear through some kind of contract, or they have the right of first refusal, so that if they are given the power of corporate governance, they can infringe on the interests of the last risk-bearer by "knocking down", so only the last risk-bearer can participate in the corporate governance of the company. Therefore, only the final risk-bearer should be given the power to control the risk of "tampering", i.e., the power of corporate governance.

(4) There is also a lack of empirical research in the existing literature on the relationship between stakeholder participation in governance and corporate performance, which does not provide strong evidence for the theory of "stakeholder "*** governance. It can be seen that although the "stakeholder" theory recognizes the role of risk in determining the subject of corporate governance, it fails to recognize that not all risks lead to the participation of their bearers in corporate governance.