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Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

A Skeptical View of Financialized Corporate Governance

  • Anat R. Admati
Journal of Economic Perspectives
vol. 31, no. 3, Summer 2017
(pp. 131–50)
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Abstract

Managerial compensation typically relies on financial yardsticks, such as profits, stock prices, and return on equity, to achieve alignment between the interests of managers and shareholders. But financialized governance may not actually work well for most shareholders, and even when it does, significant tradeoffs and inefficiencies can arise from the conflict between maximizing financialized measures and society's broader interests. Effective governance requires that those in control are accountable for actions they take. However, those who control and benefit most from corporations' success are often able to avoid accountability. The history of corporate governance includes a parade of scandals and crises that have caused significant harm. After each, most key individuals tend to minimize their own culpability. Common claims from executives, boards of directors, auditors, rating agencies, politicians, and regulators include "we just didn't know," "we couldn't have predicted," or "it was just a few bad apples." Economists, as well, may react to corporate scandals and crises with their own version of "we just didn't know," as their models had ruled out certain possibilities. Effective governance of institutions in the private and public sectors should make it much more difficult for individuals in these institutions to get away with claiming that harm was out of their control when in reality they had encouraged or enabled harmful misconduct, and ought to have taken action to prevent it.

Citation

Admati, Anat R. 2017. "A Skeptical View of Financialized Corporate Governance." Journal of Economic Perspectives, 31 (3): 131–50. DOI: 10.1257/jep.31.3.131

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • G24 Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • G34 Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
  • K22 Business and Securities Law
  • M14 Corporate Culture; Diversity; Social Responsibility
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