Corporate governance and the long‐run investor

Abstract

This paper lays out prolegomena for an alternative to shareholder theory. It links the corporation as the owner of the firm, a team theory of the firm that defines corporate governance as a co‐ordination game and the crucial role of the Board of Directors as an integrator of stakeholders’ interests. The spur of intangible assets as sources of value creation has enhanced the diversity of claimants on the firm’s value. The paper shows that the co‐ordination game has multiple stable solutions, leading to diverse modes of governance. The Stock market cannot pick up one‐best‐way. The outcome of the game depends on the power structure within corporations, which in turn is linked to the dominant pattern in the financial system. The second section of the paper emphasizes the upcoming preponderance of long‐run institutional investors, who can be considered as universal owners. Their strategic asset allocation induces them to maximize total long‐run value of all the firms in the whole economy, to integrate extra‐financial risks associated with intangible assets and with long‐run liabilities and to use voice rather than exit in corporate governance. The paper suggests how the activism of those investors can introduce checks and balances in the corporate power structure.

Keywords:

• intangible assets
• universal owners
• mean reverting force
• shareholder activism

JEL classification codes:

• C72
• G11
• G23
• G30