Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increaing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy. © M. C. Jensen, 1993

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Summary. We model and experimentally examine voting by a board designed to mitigate conflicts of interest between privately informed insiders and owners. Our model demonstrates that, as argued by researchers and the business press, boards with a majority of trustworthy but uninformed “watchdog”agents can implement institutionally preferred outcomes. Our laboratory experiments strongly support this conclusion. Our model also highlights the necessity of penalties on insiders when there is dissension among board members. However, penalties for conflicting recommendations appeared to have little impact on the experimental outcomes. JEL Classification: G3, C7.

This paper examines the association between the composition of the board of directors and earnings management activity for a period spanning the publication of the Cadbury Report (1992). Central to both the Cadbury Committee's initial remit and its subsequent recommendations is the view that director integrity and board effectiveness play a key role in ensuring the quality and reliability of published financial statements. We evaluate the impact of the Cadbury Report by testing for evidence of income-increasing abnormal accruals when unmanaged earnings undershoot target earnings and whether outside directors help constrain such activity. Our results provide evidence of accrual management to meet earnings targets in both the pre- and post-Cadbury periods. However, while we find no evidence of an association between the degree of accrual management and the composition of the board of directors in the pre-Cadbury period, results for the post-Cadbury period indicate less income-increasing ...

Central to both the Cadbury Committee's initial remit and its subsequent recommendations is the view that director integrity and board effectiveness play key roles in ensuring the quality and reliability of published financial statements. Using a constant sample, this paper tests whether the association between board composition and earnings management activity differs between the pre- and post-Cadbury periods. Earnings management is measured by the use of income-increasing abnormal accruals when unmanaged earnings undershoot target earnings. Results provide evidence of accrual management to meet earnings targets in both periods. However, while we find no evidence of an association between the degree of accrual management and the composition of the board of directors in the pre-Cadbury period, results for the postCadbury period indicate less income-increasing accrual management to avoid earnings losses or earnings declines when the proportion of non-executive directors is high. These r...

this paper; without such a framework the research suggestions would not make much sense. This rationale can be restated as a disclaimer: the policy ideas set forth in this essay are not to be construed as assumptions of fact about the present or future course of the Bank's policies

This paper is a product of the Financial Sector Development Department. It is a slightly revised version of a paper presented at the Conference on Corporate Governance in Central Europe and Russia, December 15-16, 1994, organized by the World Bank and the Central European University Privatization Project. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Priscilla Infante, room G8-118, extension 37642 (50 pages). May 1995

Institutional investors are to students of corporate governance what banks were to Willie Sutton – they’re where the money is. But they weren’t always. 1 As recently as 1980, institutional investors – principally banks, insurance companies, mutual funds, private pension funds, and state and local government pension funds – held only 27 percent of U.S. equities. By

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