Corporate Governance

Journal of Banking & Finance 22 (1998) 371±403

Corporate governance and board e€ectiveness
Kose John a, Lemma W. Senbet a b

1

b,*

Stern School of Business, New York University, New York, NY 10012, USA Department of Finance, College of Business, University of Maryland, Tydings Hall, College Park, MD 20742, USA

Abstract This paper surveys the empirical and theoretical literature on the mechanisms of corporate governance. We focus on the internal mechanisms of corporate governance (e.g., corporate board of directors) and their role in ameliorating various classes of agency problems arising from con¯icts of interests between managers and equityholders, equityholders and creditors, and capital contributors and other stakeholders to the corporate ®rm. We also examine the substitution e€ect between internal mechanisms of corporate governance and external mechanisms, particularly markets for corporate control. Directions for future research are provided. Ó 1998 Elsevier Science B.V. All rights reserved. JEL classi®cation: G30; G32 Keywords: Corporate governance; Corporate ®nance; Internal and external mechanisms of corporate governance

``E€orts to reform company government have concentrated on making managers afraid. It is time now to make boards greedy ' ' [The Economist, August 9, 1997]

* 1

Corresponding author. Tel.: [phone]; e-mail: [e-mail]. This paper was an invited paper on the occasion of the JBF 20th anniversary.

0378-4266/98/$19.00 Ó 1998 Elsevier Science B.V. All rights reserved. PII S 0 3 7 8 - 4 2 6 6 ( 9 8 ) 0 0 0 0 5 - 3

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K. John, L.W. Senbet / Journal of Banking & Finance 22 (1998) 371±403

1. Introduction Corporate governance deals with mechanisms by which stakeholders of a corporation exercise control over corporate insiders and management such that their interests are protected. The stakeholders of a corporation include equityholders, creditors and other claimants who supply capital, as well as

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