The Limits of Corporate Law in Promoting Good Corporate Governance

Abstract:     
Discussions of corporate governance reform often combine prescriptions for legal reform with prescriptions for better governance practices. Both sets of prescriptions - for better law and for better practices - typically focus on the board of directors, and particularly "independent" directors. The assumption is that the law can affect the governance behavior of the board by establishing roles for outside directors and by motivating independent directors to do a good job. The extent to which law can promote good governance in the boardroom, however, is quite limited. This comment briefly outlines the limits of corporate law in promoting good corporate governance and in doing so helps clarify the gap that must be filled by nonlegal influences.

Keywords: governance, shareholder vote, shareholder suits, derivative suits

JEL Classifications: G34

Working Paper Series