Quiet Politics and Business Power

Corporate governance concerns the ways in which owners – that is, shareholders – control those who run the company for them – that is, managers. There are many dimensions of corporate governance, including transparency (the extent to which managerial decisions are subject to public scrutiny), accountability (the extent to which shareholders can discipline managers for the ways in which their decisions affect corporate performance), and incentive compatibility (the extent to which the goals of management and the goals of shareholders are aligned). These are all problems of monitoring and sanctioning. The question for political scientists studying the politics of corporate governance is which dimensions of variation in national institutions of corporate governance are the most important, theoretically, in explaining the differences observed between liberal market economies (such as the United States) and coordinated market economies (such as Germany).

In recent years, scholars working in a variety of analytical traditions have come to focus on the market for corporate control as the key indicator of systemic distinctions among different varieties of capitalism. The market for corporate control refers to the way in which the effective power over companies – that is, the ability to replace a senior management team – changes hands. There are two ideal-typical solutions to the problems of monitoring and sanctioning inherent in the corporate governance of publicly listed companies, both of which operate through the market for corporate control. In the first, the price of a company's shares serves as a public tool for dispersed shareholders to monitor and discipline managers. Markets pay close attention to the ability of a company to meet earnings expectations in each quarter, and a failure to meet those expectations causes some owners to sell their shares, and the share price of the company to fall. If the share price falls too far, the company can be taken over by new owners, who will replace the management team and attempt to reallocate the company's resources more efficiently. In this first scenario, public information and the threat of hostile takeover discipline a managerial team. Thus, the market for controlling the corporation is said to be an active constraint on the ability of managers to misuse the company's assets.