Introduction

In most countries, managers of corporations are legally responsible to the shareholders. In their seminal contribution on the separation of ownership and control, Berle and Means (1932) argue that in practice managers do not pursue the interests of shareholders. Instead they pursue their own interests, which results in waste and inefficiency. The contrast between the legal rights of shareholders and the de facto control of managers highlighted by Berle and Means led to the development of the agency approach to corporate governance (see, among others, Coase 1937; Jensen and Meckling 1976; Fama and Jensen 1983a,b; and Hart 1995). An excellent survey is contained in Shleifer and Vishny (1997).

The agency theory of corporate governance focuses on the question:

We argue that this focus is much too narrow. A comparison of governance mechanisms in different countries and in different sectors of the economy suggests that an alternative approach is called for.

In Section 2, we review the actual operation of corporate governance in the United States, United Kingdom, Germany, France, and Japan. In the United States and United Kingdom, the mechanisms for ensuring that managers operate in the interests of shareholders are the strongest. The main internal governance system is the board of directors; the main external governance system is the market for corporate control. The effectiveness of both mechanisms has been widely questioned.