Document Type


Publication Date



Shareholder ownership, Shareholder control, Director control, Monitoring model of board function, Mediating model of board function, Director primacy, Director authority, Monitoring hypothesis, Mediating hypothesis


Business Law, Public Responsibility, and Ethics | Business Organizations Law


This Article evaluates two possible explanations for why shareholders of public corporations tolerate board control of corporate assets and outputs: the widely accepted monitoring hypothesis, which posits that shareholders rely on boards primarily to control the "agency costs" associated with turning day-to-day control over the firm over to self-interested corporate executives, and the mediating hypothesis, which posits that shareholders also seek to "tie their own hands" by ceding control to directors as a means of attracting the extracontractual, firm-specific investments of such stakeholder groups as executives, creditors, and rank-and- file employees.

Part I reviews each hypothesis and concludes that each is theoretically plausible and internally consistent, and that the validity of each theory must be established or rejected on the basis of empirical evidence. Part II evaluates the available empirical evidence, including new evidence on charter provisions of initial public offerings, and concludes that, as both a positive and a normative matter, corporate takeover law is consistent with the view that directors are not just monitors, but also perform a mediating function. Finally, Part III discusses future directions for empirical research, identifies some pitfalls to be avoided, and concludes that the current empirical evidence favors the mediating model.


This article was written prior to the author's affiliation with Cornell Law School.

Publication Citation

Published in: University of Pennsylvania Law Review, vol. 152, no. 2 (December 2003).