Most people accept that innovating involves risk. If a gene therapy patient dies, regulators stiffen controls, but they don’t make gene therapy impossible. Similarly, the United States must apply balance in addressing business scandals. Corporate governance problems call for safeguards, but not to the point of hobbling risk taking and economic growth. As dangerous as an Enron Corp. is, even more dangerous would be a system designed to make all future Enrons impossible.
Consider the U.S. economy over the past 20 years. The bursting of the stock market’s bubble followed years of corporate restructuring and innovation. Boards seeking maximum value from the changes often offered executives generous incentives, including stock options.
Some executives manipulated boards for personal gain. The result: universal indignation and both regulatory change (new governance guidelines from the New York Stock Exchange and NASDAQ) and legislative change (the Sarbanes-Oxley Act of 2002).
Is corporate governance so in need of help? The belief that unbridled executive compensation has hurt the stock market irreparably and that investor confidence must be restored is not supported by the facts. The U.S. stock market outperforms those of other countries over long horizons, and even after the scandals it performed no worse than other stock markets.Moreover, two decades of restructuring (and executive incentives) have led to valuable productivity gains.
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