Litigation, when used as the primary means of resolving ills, saddles American companies with costs and risks that are lower elsewhere. Moreover, the rules-based system that is the foundation of corporate governance in the United States relies on the rather cavalier assumption that regulators are sufficiently well-informed to document the conditions under which corporate governance can be effective.

Fed chairman Ben Bernanke has suggested evaluating, as an alternative, the strengths and weaknesses of the United Kingdom’s principles-based approach to governance. In September, Jamie Dimon, CEO of JPMorgan Chase, and Richard Kovacevich, chairman of Wells Fargo, announced they were spearheading an industry lobby group advocating that approach. UK companies still have to comply with legislation, but the onus is on the corporate board members themselves to stand back and question whether they are complying and acting within the principles and spirit of the law. If they are not compliant, they have a duty to go back to their shareholders and explain why. If the shareholders agree through a vote that such noncompliance is acceptable, then the company does not have to comply (provided that the position is legal). This leads to a much more responsive, flexible and transparent system in which the sovereignty of the board ensures much greater oversight of the power of the CEO. It is worth noting that the regulatory laws in the UK never mention the chief executive.

In the United States, demands from institutional fund managers have just begun to enhance shareholder power. Although dated now, The Modern Corporation and Private Property by Adolph Berle and Gardiner Means was a seminal text for executives and politicians for many decades following its publication in 1932. The key passage is: "In the Darwinian struggle for survival, the American public company is the winner because of its reliance on the largely unfettered powers of strong managers and the existence of small, fragmented shareholders weakened by their inability to coordinate. . . . If the shareholders did not like the use and abuse of such managerial power, they could sell. This structure is seen as far outweighing in efficiency the costs that it incurs." There was a time when challenging this set of beliefs was seen as un-American.

Whither New York?
In the UK, more than 90 percent of FTSE-listed companies separate the roles of chairman and CEO, and frown on giving a combined role to one person. The Sarbanes-Oxley Act of 2002 (SOX) sent many U.S. firms scurrying to separate the two roles, but that brings us to the drawbacks of the rules themselves. Bernanke and New York Governor Eliot Spitzer have both argued that SOX needs amending, particularly because the annual compliance costs discourage small companies from public listings, and have caused a number of world players to de-list from New York.

In addition, the potential penalties might cause a company to look to competing capital markets. For example, if a CEO signs off, however unwittingly, on an inaccurate quarterly account, the maximum penalty this individual faces is a personal fine of $5 million and up to 20 years in jail. During the passage of SOX, I occasionally acted as a corporate governance guru for CNN, and said jokingly that if I were an American CEO and had inadvertently signed off on an inaccurate quarterly account, I would lure my CFO to a chosen U.S. state and shoot him or her. I would then get only 12 years for murder and no fine.

For the moment, the United States is still the place to raise capital, but competition from London and elsewhere is increasingly strong. China and India will develop their own capital-raising capacities as they grow. The smart money is also looking at the Johannesburg Stock Exchange as China seeks Africa’s mineral and energy wealth.

The American way works now, but is starting to falter. Adopting a principles-based approach would help develop shareholder democracy through better accountability, transparency and probity around the boardroom table, and would rein in the absolute power of the chief executive. My concern is whether there is a political will to make such a change. If not, I predict that a long slide in the preeminence of the New York capital markets has started.

Art by Matt Mahurin.

Bob Garratt is a visiting professor at Cass Business School in London and the chairman of the Unit for Corporate Governance in Africa at the University of Stellenbosch, South Africa.