Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/76913 
Year of Publication: 
1997
Series/Report no.: 
Working Paper Series: Finance & Accounting No. 3
Publisher: 
Johann Wolfgang Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften, Frankfurt a. M.
Abstract: 
The paper discusses the role of various constituencies in the corporate governance of a corporation from the perspective of incomplete contracts. A strict shareholder value orientation in the sense of a rule that at any time firm decisions should be made strictly in the interest of the present shareholders would make it difficult for the firm to establish long-term relationships as the potential partners would have to fear that, at a later stage of the co-operation, the shareholders or a management acting only on their behalf could exploit them because of the inevitable incompleteness of long-term contracts. One way of mitigating these problems is to put in place a corporate governance system which gives some active role to the other stakeholders or constituencies, or which makes their interests a well-defined element of the objective function of the firm. A commitment not to follow a policy of strict shareholder value maximization ex post can be efficient ex ante. Such a system would clearly differ from what is advocated by proponents of a stakeholder approach, as it would limit the rights of the other constituencies to those which would have been agreed upon in a constitutional contract concluded between them and the founder of the firm at the time when long-term contracts are first established.
Subjects: 
corporate governance
incomplete contracts
theory of the firm
JEL: 
D21
D23
L21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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