Corporate scandals beginning in the late 1990s focused renewed attention on corporate governance, but significant cracks in the governance system also contributed to recent problems. Deregulation and growth of financial markets, as well as changes in the competitive environment, have had important consequences that weakened corporate governance. In essence, institutions that historically have played a significant role in governance now play a lesser role, as more reliance has been placed on the financial markets. Other aspects of the system have not picked up the slack. Banks, for example, have played a governance role in their credit approval process and monitoring of corporate performance after a loan has been granted. However, as companies increasingly by-pass financial institutions and go directly to the debt markets, the markets themselves must provide the monitoring and discipline.
The changing role of institutions places a greater burden on the quality of information available to the markets and the regulatory environment, but information intermediaries and regulation have not been up to the task. As a co-coordinator of the Schools Global Corporate Governance Initiative, Professor Crane is exploring with other faculty members the implications of this shift from institutions to a greater reliance on debt and equity markets in the US and elsewhere. This shift affects many aspects of governance and raises important questions about the design of effective corporate governance systems.