A Model of Corporate Governance As a System

This paper provides a rationale for the coexistence of different systems of corporate governance based on the multitude of agency problems typically to be governed within a given firm. Because there are complementarity and substitution relationships between governance instruments, specific combinations of instruments which reinforce each other in minimizing agency costs fit together better than alternative combinations. We derive comparative static results showing how various governance instruments can be combined to form a coherent system of corporate governance and how changes in exogenous parameters can lead to simultaneous, systemic changes in the instruments used.