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Can Governance Be the Solution to the Reactive Nature of Laws?

The financial scandals of the last decades have largely been attributed to the recklessness of corporate managers in the diffused (dispersed) ownership system, and excesses of controlling shareholders in the concentrated ownership structure. Coffee described the dispersed ownership system as market-driven with each stockholder owning a piece of the corporation whereas, concentrated ownership system relies on the controlling majority (Coffee, 2005), and mostly owned by family. The fall of companies like Enron, Parmalat, WorldCom, Nortel Networks and others have largely been the focus of financial economists in the recent history. Financial statement restatement, high market expectation for future growth, and lack of auditors’ independence have been linked to the downfall of these companies. In consequence, government introduced the long-awaited legislation in Sarbanes and Oxley Act (2002) with the aim of forcing companies into good corporate governance.