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Abstract

The period from November 1, 2001 to October 1, 2002 has been an astonishing period for corporate governance in many respects. It began with the completely unexpected collapse of Enron Corporation on November 1, 2001, followed almost immediately thereafter by widely publicized downward profit restatements and bankruptcy filings by a significant number of telecommunication companies. Since November 1, 2001, there have been numerous public reports of fraud, misconduct, and scandals by directors of other well-known corporations such as Lucent Technologies, Kmart, Merck & Co., and Rite Aid Corporation. There also have been disclosures of many instances in which corporate officers and directors of well-known companies have enriched themselves by hundreds of millions of dollars at the expense of their shareholders. While these transactions occurred primarily in the telecommunications industry, the resulting transfer of wealth from small investors to officers and directors must surely be one of the greatest transfers of wealth that ever occurred over a three-and-one-half-year period during a time of peace. Not surprisingly, these unexpected developments caused (or at least contributed significantly to) a sudden and sharp decline in securities prices and a significant decline in shareholder confidence as to the honesty and efficiency of the securities markets. A recent Wall Street Journal/NBC poll shows that seventy-one percent of Americans believe that “more should be done to crack down on corporate fraud.” President Bush first dismissed this decline in securities prices as merely involving “a few bad apples,” but as the decline continued he quickly agreed that there should be a crackdown on corporate fraud. To date, however, he has apparently made little effort to follow up on this pledge, and has concentrated most of his recent energies on his successful mid-term 2002 election efforts and on his campaign against Iraq.

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