For the exclusive use of L. Willert, 2016. ROCK CENTER FOR CORPORATE GOVERNANCE
For the exclusive use of L. Willert, 2016. ROCK CENTER FOR CORPORATE GOVERNANCE
CASE: CG-11
DATE: 01/15/08 MODELS OF CORPORATE GOVERNANCE:
WHO’S THE FAIREST OF THEM ALL?
In 2007, corporate governance became a well-discussed topic in the business press. Newspapers
produced detailed accounts of corporate fraud, accounting scandals, excessive compensation, and
other perceived organizational failures—many of which culminated in lawsuits, resignations, and
bankruptcy. The stories ran the gamut from the shocking and instructive (epitomized by Enron
and the elaborate use of special purpose entities and aggressive accounting to distort its financial
condition in 2001) to the shocking and outrageous (epitomized by Tyco partially funding a $2.1
million birthday party in 2002 for the wife of CEO Dennis Kozlowski, which included a vodkadispensing replica of the statue David). Central to these stories was the assumption that
somehow corporate governance was to blame. That is, there was a functional failure in the
system of checks and balances established to prevent abuse by executives.
The need for a governance system is based on the assumption that the separation between the
owners of a company and its management provides self-interested executives the opportunity to
take actions that benefit themselves, with the cost of these actions borne by the owners.1
Economists refer to such a situation as the agency problem. To lessen agency costs, some type
of control or monitoring system is put in place in the organization. At a minimum, the
monitoring system consists of a board of directors to oversee management on behalf of
shareholders and an external auditor to express an opinion on the reliability of financial
statements. In the majority of companies, however, governance systems are influenced by a
much broader group of constituents, including creditors, labor unions, customers, suppliers,
investment analysts, the media, and regulators (see Exhibit 1). In order for governance systems
to be economically effective, they should decrease agency costs above and beyond the direct cost
of compliance and the indirect cost on managerial decision making. 1 This issue was the basis of the classic discussion in Berle and Means, The Modern Corporation and Private
Property, (New York: Harcourt, Brace and World, 1932).
Professor David F. Larcker and Brian Tayan prepared this case as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Copyright © 2007 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order
copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or
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