Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday, July 3, 2014
Editor's Note: The following post comes to us from Benjamin Hermalin, Professor of Finance at the University of California, Berkeley; and Michael Weisbach, Professor of Finance at Ohio State University.
The central focus of research in corporate governance has historically been on the problems of controlling managers’ actions. Without minimizing the real-world importance of such control problems, in our paper, Understanding Corporate Governance Through Learning Models of Managerial Competence, which was recently made publicly available on SSRN, we argue that such a focus is incomplete and ignores important factors affecting corporate governance. In particular, it overlooks the crucial element of career concerns: managers care about the inferences that current and future employers draw over time about their abilities from observing their performance.