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Shareholder As Ulysses: Some Empirical Evidence On Why Investors In Public Corporations Tolerate Board Governance, Lynn A. Stout

Cornell Law Faculty Publications

This Article evaluates two possible explanations for why shareholders of public corporations tolerate board control of corporate assets and outputs: the widely accepted monitoring hypothesis, which posits that shareholders rely on boards primarily to control the "agency costs" associated with turning day-to-day control over the firm over to self-interested corporate executives, and the mediating hypothesis, which posits that shareholders also seek to "tie their own hands" by ceding control to directors as a means of attracting the extracontractual, firm-specific investments of such stakeholder groups as executives, creditors, and rank-and- file employees.

Part I reviews each hypothesis and concludes that each …