At the beginning of the 20th century, the rise of monopolies forced governments to enact anti-trust legislations in order to maintain a free market. Since then, the amount of government intervention in business has grown exponentially. In recent times, fraud and moral hazard have caused a focus on corporate governance legislation. Regrettably, ethics cannot be legislated, and government intervention only hurts businesses which conduct themselves properly while doing nothing to mitigate new forms of unethically-designed financial engineering.
As new financial instruments are developed, globalization increases, and unprecedented macroeconomic environments are encountered (e.g. extremely low interest rates), opportunities for unethical behavior can arise. But when investors take losses because of poor corporate governance, their collective demand forces companies to make a change or perish, and therefore, corporations design effective controls to avoid issues in the future. Government regulations are reactive – they attempt to fix problems that have already occurred. However, market forces create solutions to problems long before government regulations are put in place. After banking stocks fell due to the 2007/2008 financial crisis, risk management committees were set up and boards were reorganized to include directors with “finance and investment” experience. Because self-regulation focuses on maximizing shareholder value, it tends to be financially efficient. To say nothing of simple bureaucratic bloat, government regulations take a public opinion/stakeholder-focused approach, and therefore costs to businesses are far higher than what they would be under self-regulation. For example, General Motors recently announced t...
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...tates today - 12.2 percent of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson - is involved in some strategy of socially responsible and sustainable investing.”
Although the transgressions of a tiny percentage of corporate managers have hurt investors and the economy, market forces have mostly been able to direct proper corporate governance. When our markets first formed, certain regulations were needed to create their basic framework of functionality – but in today’s age when government uses its own methods to control corporate governance, it is to both corporations’ and investors’ detriment.
Bruno, V., & Claessens, S. (2010). Corporate governance and regulation: Can there be too much. Journal of Financial Intermediation, 461-482.
McKinsey & Company. (2002). Global Investor Opinion Survery: Key Findings.