Abstract
Corporate governance and the theory of the firm are two of the fastest growing topics in modern economic theory. Berle and Means argued that modern corporations were so dependent upon professional managers that a managerial economy had emerged, characterized by the separation of ownership from control in corporations. The managers decided upon the running of the corporation whilst the shareholders, though they were the owners, were only entitled to receive cash flows. This leads to potential conflicts between the interests of the shareholders and those of the management. Following these two pioneering works, significant contributions have since been made in the areas of property rights theory (Hart and Moore, 1990), agency theory (Jensen and Meckling, 1976), the theory of incomplete contracts (Williamson, 1985), and transactions cost theory (Williamson, 1985). All these theories contribute from different angles to an understanding of the issues of corporate governance, and fundamentally affect our thinking about what is a firm and in whose interests the firm is governed.
