**_The Modern Corporate Fornm_** Generically, there are four key attributes of the modem corporate form worldwide; see Box 2. They enable the enterprise to mobilize and deploy financial and human capital and transform inputs into outputs on a large scale efficiently. The weakness or absence of one or more of the attributes significantly impairs the corporation's efficiency. For example, with limited transferability of ownership interests, the flexibility of owners to reallocate assets to higher-use values is blunted. This would distort the market value of the business, which indicates how well management is performing. Thus, weak transferability would undercut a powerful mechanism that disciplines corporate management to satisfy owners' goals of asset value maintenance and increase.

Operating a large modem corporation inevitably involves the separation of the firm's ownership from its management. The owners select managers to run the firm, and in the process the owners relinquish some of their control as they delegate (some) decision-making to managers. "Corporate governance" refers to the set of relationships that link the ownership and control of an enterprise, the mechanisms through which these relationships are mediated (e.g., monitoring and evaluation controls), and the nature of incentives, risks and constraints that affect how the actions of a firm's owners, managers and workers as well as others (e.g., banks, suppliers and customers) influence the firm's conduct and performance. 8 The classic problem of the owners is how to structure _internally_ the corporate organization and its operations in a manner that provides the proper incentives to managers for the attainment of the owners' goals. At the same time, various _external_ incentives discipline the conduct of managers and thus ultimately affect firm performance (see Box 3). International experience suggests that improved business performance depends not only on how well a business implements the four key attributes that comprise the modem corporate form, but also on the dynamic interplay of these internal and external incentives.

# **Box 2: The Four Structural Attributes of the Modern Corporation**

1. Separate identity. The corporation is a legal entity distinct from its owners ("shareholders"), with a clear definition of and accounting for its own assets and liabilities;

2. **Limited liability for owners.** Owners' risk of financial loss is limited to their contribution to the corporation's capital; 3. **Centralized role for corporate management and a board of directors.** The day-to-day affairs of the corporation are conducted by one or more persons ("managers"), who are hired by the owners. A board of directors, elected by the owners, represents the owners' interests by giving direction to management and carrying out oversight of managers' performance; and 4. **Transferability of ownership shares.** The shareholders' ownership interests are transferable, and a tran7sfer by an owner does not, in itself, change the rights and obligations of the corporation with respect to its own assets and liabilities.

_Source:_ Broadman (1996)

**_Principal-Agent Problems._** Providing for sound corporate governance is a challenge all modern corporations the world over must meet. It is difficult to ensuire that the actions of a firm's managers (the "agents") are consistent with the interests of the firm's owners (the "principals"). When managers do not act in the interest of owners, "principal-agent problems" arise. The extent of this conflict depends on a number of factors, most importantly the extent and quality of information about the activities of the managers. Owners have dealt with the principal-agent problem through a variety of means including: increasing the flow of information made available by managers about their activities; more intense monitoring by owners and others (including banks) of managers' conduct and performance; and

> 8 See Shleifer and Vishny (1997).

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