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A Crisis of Investor Confidence: Corporate Governance and the Imbalance of Power

Richard L. Wise

A chapter in Advances in Financial Economics, 2014, vol. 16, pp 217-261 from Emerald Publishing Ltd

Abstract: Abstract Purpose Recent corporate scandals such as WorldCom, Enron, and others suggest a failure of corporate governance, that is, of the allocation of power and its lawful use and accountability within the corporation. Design/methodology/approach This chapter presents a game theoretic model for analyzing the power dynamics among the three groups responsible for oversight in the Anglo-American corporate model – namely the Board of Directors through its audit committee, corporate management, and the external auditors. Findings The chapter shows, among other findings, that the current governance structure results in an extreme imbalance of power among the three groups that not only permits but even induces management to conceal necessary financial data and often to ignore the long-term interests of the firm. Implications and value The chapter also derives changes in principles of governance that can right such imbalances and prevent defalcations from taking place through institutionalizing effective ex-ante checks and balances of power in addition to the ex post measures that come into play only after a wrong has been committed and which are the case with recent exchange rules and Congressional enactments. Research limitations None. Originality/value No prior analysis along these lines.

Keywords: Corporate governance; balance of power; sarbanes-oxley; director liability; audit committees (search for similar items in EconPapers)
Date: 2014
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