Question

How is institutional theory and corporate governance related?

Answer 1

Corporate governance is concerned with managing the relationship among various corporate stakeholders.

Roe (1994), states that the American corporate governance system emerged as a result of both economic evolution

and its democratic philosophy. In effect, the government by deliberately weakening commercial banks gave

corporate managers excessive power. U.S. Banks were prevented from becoming corporate shareholders, let alone a

large shareholder. U.S. laws further restrained activities of large shareholders.

In this manner, the profile of the American corporate shareholding became as widely dispersed as possible.

The idea, as expressed by the Coase Theorem, was that in this manner management would need to get the agreement

of numerous dispersed shareholders, and thereby act in the best interests of them all. The political view on corporate

governance was based on the belief that banks, as lenders to the corporation, should not be able to affect the payoffs

to common stockholders. The modern view on corporate governance, as expressed by North (1994), depicts formal

and informal contractual agreements among corporate stakeholders. These may include the payoff structure for

suppliers of capital such as stockholders and lenders, the incentive structure for corporate managers, and the

organizational structure for maintaining an effective balance in bargaining power of employees of the corporation.

This humanly designed organizational structure would involve transaction costs for maintaining and enforcing

agreements.