Voluntary vs Mandatory Corporate Governance: Towards an Optimal Regulatory Framework


This article fills a gap in the legal literature by comparing mandatory corporate governance regimes to voluntary corporate governance regimes. It encourages market participants, including regulators, to acknowledge that firms have incentives to adopt enhanced governance practices voluntarily and to make disclosure about the same. The article argues that an optimal governance regime is a hybrid one in which adoption of best practice guidelines is voluntary but disclosure of corporate governance practices is mandatory. Such a regime is optimal because it balances the benefits and costs to all stakeholders, particularly issuers and investors. The cost analysis should be completed by weighing the level of expected compliance against the total costs of the regime adopted by regulators. A partially mandatory structure is likely to yield a high level of compliance with a defined set of governance practices at lower cost than a wholly mandatory regime. While a wholly mandatory structure may yield slightly better compliance, its costs are likely much higher. Thus, a partially mandatory structure that minimizes costs but encourages compliance is optimal.


Business Organizations Law | Jurisdiction | Law | Law and Economics | Securities Law

Date of this Version

March 2005