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The Governance Structure of American Corporations

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With respect to the company's day-to-day operations, what is left is called net income after taxes from an accounting perspective. Within the accounting model, only two things can be done with net income: It can be returned to the shareholders as cash dividends (or repurchases of common stock, which, as we will see in Chapter 7, is the same thing) or kept in the company, where it remains under the control of the managers. When the net income is kept in the company, it can be used to buy additional assets or to pay off debt obligations.

The owners of the corporation can make their own decisions about acquiring or disposing of assets, running the day-to-day affairs of the company, and what is to be done with any residuals (net income) by themselves, or they can appoint agents to make these decisions for them. These agents, in turn, can appoint other agents. In the Anglo-American governance system, the agents directly selected by the shareholders to represent them are the corporation's board of directors (the board). The owners write contracts (explicit or implicit) with the board, which theoretically acts in the shareholders’ best interests. The board then hires a chief executive officer (CEO), who, in turn, hires other managers, and so on down the line to nonmanagement employees. The managers act as agents for the shareholders when they write contracts with the company's suppliers and customers and with other managers and employees. The CEO and other managers also write contracts with those who supply debt financing-financial institutions, bondholders, lessors, and so on. Potential conflicts of interest abound, even within the ownership group itself.
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Document Type: Research Article

Publication date: February 25, 2003

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