Corporate Reform as a Credence Service

Abstract:     
With the recent meltdown of the U.S. economy, there is no shortage of blameworthy corporate directors and managers. But this Essay focuses on another significant dimension of the current crisis: the crucial role of lawmakers and the need to reform the reformers. In a sense, corporate governance reform is like a service: corporate constituents (e.g., managers, shareholders, employees, and populist groups) function like consumers, and corporate lawmakers (e.g., federal government and the state of Delaware) function as monopoly suppliers of reform services. These reform services, however, exhibit credence characteristics, which are service attributes whose quality cannot be fully determined even after significant use. Credence characteristics, at least in the short term, make it difficult for corporate constituents to discern the impact of corporate reform due to information asymmetries. In light of these informational constraints, corporate constituents normally rely on an array of decision-making heuristics as a risk reduction strategy. As the current crisis reveals, corporate constituent overreliance on these heuristics may not adequately prevent corporate opportunism. Making matters worse, the unobservable impact of corporate reform (i.e., credence characteristics) creates perverse incentives for lawmakers (on the supply-side) to engage in opportunistic behavior at the expense of corporate constituents (on the demand-side), who are lulled into a false sense of security. This Essay focuses on an important chapter in the story of the current economic crisis and corporate scandals that cannot be ignored because it highlights the real potential for supply side (i.e. lawmaker) inefficiencies and the need to discipline lawmaker behavior as well as enhance lawmaker competence.

Number of Pages in PDF File: 12

Keywords: Corporate governance, corporations, securities law, regulation, legal profession, general counsel, in-house counsel, business, regulation, corporate, indepedence

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