This paper develops three basic economic principles for effective corporate governance: (1) information accuracy and timeliness, (2) management accountability, and (3) auditor independence. Accuracy and timeliness of information is critical to providing market participants with the data necessary to monitor and evaluate managers. Management accountability focuses on strengthening the incentives of managers to act in shareholders' interests and on increasing the likelihood and magnitude of punishment for wrongdoing. Auditor independence reduces the incentives and likelihood that auditors would give managers more leeway to undertake fraudulent or questionable acts.
The author provides a preliminary assessment of how well legislative reforms, such as the Sarbanes-Oxley Act, regulatory changes at the SEC, and private sector responses such as those from self-regulatory organizations like the NYSE and NASDAQ, conform to these economic principles. The paper concludes by commenting on current proposals from the SEC on “shareholder democracy” and emphasizing the importance of balancing private and public regulatory responses.