Commentators often tend to see corporate governance as mainly matter of how much managers should be monitored by litigation, shareholders or the takeover market. However, as I argue in Accountability and Responsibility in Corporate Governance, these devices all have significant gaps, and share the inherent problem that there are costs to trying to second-guess managerial decisions in large firms.
The main alternative is to complement regulation of inputs -- that is, managerial decisionmaking -- with a constraint on output -- that is, the cash that the firm distributes to the shareholders. In partnership-type firms this is done explicitly by contract. Because hard and fast constraints may be costly in firms with highly variable earnings, we see this mainly in firms that passively manage assets.
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