The Power of Monitoring
19 Pages Posted: 15 Apr 2004
Date Written: April 13, 2004
The corporation celebrates its 400th birthday. What Adam Smith treated sceptically in his home country, has become the dominant organizational form all over the world. Closely related with the history of the corporation is the separation of ownership (shareholders) and control (management). As the managers do not necessarily behave as shareholders want them to, internal and external monitoring mechanisms developed over time, but different within the two legal systems of Common and Civil Law. In this contribution theoretical and empirical literature concerning internal and external monitoring devices is substantially reviewed. We find that in Common Law and Civil law countries as well monitoring systems are established to align the managers' interests with those of the external capital providers. But neither system is perfect. Although monitoring turns out to be a necessity providing a second-best solution to the inherent principal-agent situation between owner and managers of a firm there are inevitable weaknesses which one should be aware of.
Keywords: principal-agent-problem, internal and external monitoring, Common Law, Civil Law
JEL Classification: M52, J33, K00, K20
Suggested Citation: Suggested Citation