August 03, 2010
Andrew Ross Sorkin argued that assessing fines against companies for misleading shareholders is unfair because it punishes the shareholders a second time. Actually, if shareholders know that their companies will be punished, hurting its stock price, if its top executives lie about the company’s performance, then they have more incentive to ensure that they do not get lying executives. This is a desirable outcome since their lying will distort stock prices, and in principle, lead to misplaced investment.
Of course if shareholders really have very little control over companies then this increased incentive will have little effect. However, that would be a very serious indictment of the system of corporate governance.
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