This paper develops three basic economic principles for effective corporate governance: (1) information accuracy and timeliness, (2) management accountability, and (3) auditor independence. Accuracy and timeliness of information is critical to providing market participants with the data necessary to monitor and evaluate managers. Management accountability focuses on strengthening the incentives of managers to act in shareholders' interests and on increasing the likelihood and magnitude of punishment for wrongdoing. Auditor independence reduces the incentives and likelihood that auditors would give managers more leeway to undertake fraudulent or questionable acts. 2004 Morgan Stanley.