ABSTRACT
CORPORATIONS ARE REPUBLICS. THE ULTIMATE authority rests with voters (shareholders). These voters elect representatives (directors) who delegate most decisions to bureaucrats (managers). As in any republic, the actual power-sharing relationship depends upon the specific rules of governance. One extreme, which tilts toward a democracy, reserves little power for management and allows shareholders to quickly and easily replace directors. The other extreme, which tilts toward a dictatorship, reserves extensive power for management and places strong restrictions on shareholders’ ability to replace directors. Presumably, shareholders accept restrictions of their rights in hopes of maximizing their wealth, but little is known about the ideal balance of power. From a theoretical perspective, there is no obvious answer. In this paper we ask an empirical question-is there a relationship between shareholder rights and corporate performance?
