Corporate Governance in the United States

Corporate Governance in the International Business Landscape

Definition of Corporate Governance in the context of U.S. international business and public trade policy: The structures and processes by which corporations are managed.

Government Intervention

Corporate scandals have led to public pressure to reform business practices and increase regulation. Of course, dishonesty, greed, and cover-ups are not new societal concerns. Indeed,
much of the existing system of corporate regulation in the United States emerged in response to vagaries of the late 1920s and the subsequent stock market crash. What has changed in
recent years, though, is the frequency and public salience of corporate scandals. As a measure of public attention, consider that, in 1998, The Economist published no editorials devoted to
corporate governance issues. By 2002, it published twenty of them, followed by twenty more in 2003 and more still in 2004.

The public outcry over the corporate governance scandals has made it clear that the status quo is no longer acceptable: the public is demanding accountability and responsibility in corporate behavior. It is widely believed that it will take more than just leadership by the corporate sector to restore public confidence in our capital markets and ensure their ongoing vitality. It will also take effective government action, in the form of reformed regulatory systems, improved auditing, and stepped up law enforcement.

Already policymakers have adopted numerous reforms. In 2002, Congress speedily passed the Sarbanes-Oxley Act, imposing (among other things) new financial control and reporting
requirements on publicly traded companies. The Securities and Exchange Commission (SEC) and the self-regulatory organizations it oversees—both the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD)—have adopted new standards for public companies and securities dealers. The newly created Public Company Accounting Oversight Board (PCAOB) is working to revamp oversight of auditors. Finally, state and federal enforcement officials have responded by aggressively pursuing a number of highly publicized prosecutions against corporate leaders and others accused of violating financial rules.

These responses make clear that the governance of corporations has become a central item on the public policy agenda.

The corporate scandals themselves demonstrate that lax regulatory institutions, standards, and enforcement can have huge implications for the economy and for the public. Of course, government responses to scandals should be well considered and effective. Regulatory reforms that over-react or that address symptoms while ignoring underlying causes can be costly and counterproductive.

Government’s task is to restore corporate integrity and market confidence without stifling the dynamism that underlies a strong economy.

The corporate crisis has brought into relief the challenge of who should regulate. Currently, the government shares regulatory authority and oversight with various nongovernmental, self-regulatory institutions. Self-regulation has been prominent in the operation of securities markets as well as in the oversight of the accounting and legal professions. Are these existing self-regulatory arrangements sufficient? Should government change its oversight of self-regulatory institutions? Or should government assume a greater and more direct role in
regulating?

In addition to choosing who will regulate, recent scandals have highlighted the challenge of deciding how to regulate. Most broadly, regulators face a choice between principles and rules.
Should regulatory standards articulate broad goals or purposes, guiding behavior through the adherence to general principles?.

Or should regulations take the form of specific rules that tell companies and their lawyers and auditors exactly what is acceptable and unacceptable? Rules have their virtues, and they have
been widely used, but they also may allow corporate actors to find ways to comply with the letter of the law while circumventing its spirit.

Finally, regulators face the challenge of deciding how to enforce the rules or principles they have adopted. Is more aggressive enforcement needed? Should enforcement officials target
just individual perpetrators, or should they also go after the corporations in which misconduct occurs? When should regulators pursue criminal (as opposed to civil) sanctions? Furthermore,
since both the state and federal governments have jurisdiction over publicly traded corporations, enforcement officials must constructively deal with jurisdictional competition.

Conclusion
The crisis of confidence in America’s capital markets, sparked by the corporate scandals of the past several years, has generated widespread debate over proposals for regulatory changes.
Underlying these discussions are fundamental policy issues about the role of government in corporate governance. Although these policy issues are sometimes framed as simple dichotomies—for example, government regulation versus self-regulation, principles
versus rules, or criminal versus civil penalties—the choices government faces are in fact neither simple nor dichotomous.

What, then, is the role of government in corporate governance? It is undoubtedly not any single role, but different roles—that of policymaker, enforcer, and overseer—in different situations. Accordingly, there is still another fundamental role for government to undertake: the role of the analyst, seeking to identify the conditions under which to deploy different configurations of regulatory institutions, standards, and enforcement practices. Given the range of policy issues raised by corporate governance, and the variety of industries and firms involved, government decision makers will need to understand thoroughly the effects that different regulatory actions can have in terms of a range of policy criteria.

On the issue of self-regulation, this means, among other things, considering the effectiveness of self-regulatory organizations as policymakers as well as enforcers. It also calls for careful
evaluation of the recent structural changes in self-regulatory organizations. What impact will these changes have on the credibility and effectiveness of self-regulation?

On the issue of regulatory design, decision makers need to understand better what makes different degrees of specificity and generality “right” for particular types of regulatory problems.
They also need to assess whether certain hybrid systems can overcome some of the limitations of rules or principles alone. Finally, on the issue of enforcement, state and federal officials
should analyze why some individuals and organizations adhere responsibly to regulatory standards—and why others do not. Such analysis would help enhance government’s ability to pursue optimal enforcement, instead of under- or over-enforcement.

Corporate Governance and Corporate Law

This section provides basic coverage of Corporate Governance in relation to U.S. state and federal corporate law. For comprehensive coverage, please visit the main entry.

Resources

See Also

• Corporate Law