misallocation. Second, various corporate governance structures that exist around the world reflect the country-specific political, legal and cultural environments. They are not the outcomes that have evolved purely based on economic efficiency reasons. Again, the governance structure in which decision-making authority is concentrated to the controlling shareholder is consistent with economic principles. Third, while the advocates of the corporate governance movement contend that decision-making authority of the president of a conglomerate with affiliates should be limited to the ratio of his owned shares relative to the total shares outstanding, they confuse the way of decision-making in the private economic sector with that of the public political sector where a democratic way of decision-making prevails. Exploitation of ‘the minority’ by ‘the majority’ is possible in the public sector because the minority does not have any good way to escape it. Thus some measures are necessary to protect the minority. However, the importance of those measures in the private sector would decrease since the minority has an escape hatch. Therefore, the corporate governance movement would be justified to the extent that it further lowers exit costs. It would increase the overall decision-making costs if it were to reinforce the influence of minority shareholders in decision-making.
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Abstract
Property Rights, Corporations, and Conglomerates
Young-Yong Kim Kyung-Suk Park
Corporations and conglomerates have developed as a form of property rights to internalize the external benefits from commercial activities. In order to successfully internalize the benefits, corporations and conglomerates must reduce both decision-making and external costs that are the most important part of the overall internalization costs. The decision-making costs are reduced by concentrating decision-making authority in the hands of a small number of managers, and external costs that might be imposed on the shareholders are avoided or reduced through stock market transactions.
In this regard, conglomerates that consist of affiliated firms have developed with a controlling shareholder whereas no controlling shareholder characterizes M-form conglomerates. Documented empirical observations largely support these findings. Finally, advocates of ‘corporate governance movement’ fail to understand the economic theory underlying the operations of corporations and conglomerates.