Until a few years ago, “corporate governance” wasn’t a likely topic of conversation unless you were in B-School or hung out with Steve Bainbridge. But then the collapse of Tyco and Enron caused the value of mutual funds to plummet and suddenly the issue was in the news. Jeff Skilling and Ken Lay became household names while the issues behind the headlines remained murky. Even now, years after the scandals it's difficult for the layman to understand what it was all about.

You won't have to enroll in MBA course, though, to learn the relevant facts now that a lesson in corporate governance has been provided from a rather unlikely source -- Fed Chairman Alan Greenspan. The “maestro” may not often be praised for his lucid prose but the recently uncovered memo “Corporate Accounting and Disclosure: A Diagnosis of the Problem” may soon change that. In his outline of the problems that led to recent scandals he explains how corporate governance is "suppossed to work."

Unless you're a wonkish economist, Federal Reserve memos probably aren't on your usual reading list. But for anyone in the “investor class” – which now includes everyone with a 401K – this one provides an insightful overview of the issues concerning corporate governance. As a shareholder armed with this knowledge you still won't have any say in how a company is run. But at least now you'll know why.

[For more on the subject be sure to check out Professor Bainbridge’s archive.]

(Link via: Slate)