Determinants of Optimal Corporate Governance
Authors:Hussein Dewji, Scott Miller
Mentor:Scott Miller, Assistant Professor of Finance, Pepperdine University
This paper will take a multi-disciplinary approach to evaluate the optimal governance structure from both a management and finance perspective. Determinants of optimal corporate governance include internal and external mechanisms that directly impact the effectiveness of a firm’s governance system. Linkage of optimal corporate governance and firm performance is highlighted throughout this paper. Internal factors include the composition of the board of directors, the structure of managerial compensation, the concentration of share ownership, and the level of firm debt. These factors are typically under a firm’s control and can be adjusted to match an organization’s firm-specific needs for governance. External factors include the market for corporate control, the managerial labor market, and the legal implications. Normally out of a firm’s direct control, these factors provide an additional form of governance for shareholders. Together, internal and external factors work to resolve agency conflict between management and shareholders; however, they need to be carefully evaluated when implementing an optimal and unique governance structure for each particular firm.