Corporate Governance & Organization Life Cycle: The Changing Role ...

The neutral technocracy objective of Berle and Means remains unfulfilled, but the subsequent emergence of the stakeholder theory and the trend toward board members who are independent outsiders have been definite steps in this direction.

The groundbreaking work of Berle and Means (1932) was followed by a growing literature that can be divided into three groups. The first group dwelled on the consequences of the separation of ownership and control and discussed governance mechanisms that address the issue of conflicting goals between owners and managers. In this category, Fama and Jensen (1983) analyzed the survival of organizations in which decision-making agents do not bear a major share of the financial consequences of their decisions. They viewed an organization as a nexus of contracts, and their main hypothesis was that the contract structures of any organization should separate the ratification and monitoring of decisions from their initiation and implementation. Shleifer and Vishny (1997) expanded this theoretical framework by stating that during the negotiation between the financiers, as owners of the firm’s capital, and the managers over the allocation of their respective responsibilities, most future contingencies are difficult to describe or foresee. As a result, when drafting their contract, the two parties have to allocate “residual control rights” (p. 741), or the rights to make decisions in circumstances not fully foreseen by the initial arrangement. In practice, no matter what the contract says, managers tend to have the residual rights in most cases since they have the expertise. In this context, the authors then described two basic approaches to improve corporate governance. One of them was legal protection of the investor’s rights and the other was concentrated ownership through large shareholdings or takeovers.

The second group of articles focused on economic concepts such as transaction costs (Williamson, 1998) and market discipline. Coase (1937) built the foundation for the formulation of transaction-cost economics. He posited that organizations exist because the cost of managing economic exchanges between firms is sometimes greater than the costs of managing transactions within firms. Without discussing