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A Crisis of Investor Confidence: Corporate Governance and the Imbalance of Power

Advances in Financial Economics

ISBN: 978-1-78350-120-5

Publication date: 11 August 2014



Recent corporate scandals such as WorldCom, Enron, and others suggest a failure of corporate governance, that is, of the allocation of power and its lawful use and accountability within the corporation.


This chapter presents a game theoretic model for analyzing the power dynamics among the three groups responsible for oversight in the Anglo-American corporate model – namely the Board of Directors through its audit committee, corporate management, and the external auditors.


The chapter shows, among other findings, that the current governance structure results in an extreme imbalance of power among the three groups that not only permits but even induces management to conceal necessary financial data and often to ignore the long-term interests of the firm.

Implications and value

The chapter also derives changes in principles of governance that can right such imbalances and prevent defalcations from taking place through institutionalizing effective ex-ante checks and balances of power in addition to the ex post measures that come into play only after a wrong has been committed and which are the case with recent exchange rules and Congressional enactments.

Research limitations



No prior analysis along these lines.




This chapter is based upon my Master’s Thesis at The Fletcher School of Law and Diplomacy. In its preparation I have greatly benefitted from advice and comments from Professor Carsten V. Kowalczyk of the Fletcher School. I am also grateful for discussions, input and encouragement from Allen C. B. Horsley, Esquire, Of Counsel to Barr & Associates P.C. of Stowe, Vermont, and to Thomas Rossman, principal of The Synthesis Group, Bronxville, New York.


Wise, R.L. (2014), "A Crisis of Investor Confidence: Corporate Governance and the Imbalance of Power", Advances in Financial Economics (Advances in Financial Economics, Vol. 16), Emerald Group Publishing Limited, Leeds, pp. 217-261.



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