Technology, Residual Claimants, and Corporate Control

Abstract

Corporate law requires that incorporated firms be managed under the direction of a board of directors who are legally accountable to the firm's shareholders (Henn; Eisenberg). The latter delegate to the board the formal authority to hire, fire, and compensate the firm's professional managers. Economists have begun to study how governance structures like the board of directors limit managerial discretion (agency) in large corporations, economize on the transaction costs associated with this organizational form, and influence firm performance (Baysinger and Butler, 1985a; Fama and Jensen, 1983a, 1983b; Williamson, 1984). Along the same lines, organization theorists have examined the board's ability to set the premises of managerial decision making through the exercise of its formal authority and, hence, to control the goal setting and strategy formulation processes (Mizruchi). Preliminary empirical tests tend to support the notion that the board of directors contributes to the effective governance of large business corporations (Baysinger and Butler, 1985a).