Jermaine Defoe's Wondergoal

THE JOURNAL OF FINANCE • VOL. LII, NO.2. JUNE 1997

A Survey of Corporate Governance

ANDREI SHLEIFER and ROBERT W. VISHNY*

ABSTRACT

This article surveys research on corporate governance, with special attention to the

importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to

corporations assure themselves of getting a return on their investment. How

do the suppliers of finance get managers to return some of the profits to them?

How do they make sure that managers do not steal the capital they supply or

invest it in bad projects? How do suppliers of finance control managers?

At first glance, it is not entirely obvious why the suppliers of capital get

anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they

sometimes do, usually they do not. Most advanced market economies have

solved the problem of corporate governance at least reasonably well, in that

they have assured the flows of enormous amounts of capital to firms, and

actual repatriation of profits to the providers of finance. But this does not

imply that they have solved the corporate governance problem perfectly, or

that the corporate governance mechanisms cannot be improved.

In fact, the subject of corporate governance is of enormous practical importance. Even in advanced market economies, there is a great deal of disagreement on how good or bad the existing governance mechanisms are. For example, Easterbrook and Fischel (1991) and Romano (l993a) make a very

optimistic assessment of the United States corporate governance system,

whereas Jensen (1989a, 1993) believes that it is deeply flawed and that a major

move from the current corporate form to much more highly leveraged...