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Most people accept that innovating involves risk. If a gene therapy patient dies, regulators stiffen controls, but they don''t make gene therapy impossible. Similarly, the United States must apply balance in addressing business scandals. Corporate governance problems call for safeguards, but not to the point of hobbling risk taking and economic growth. As dangerous as an Enron Corp is, even more dangerous would be a system designed to make all future Enrons impossible. Consider the US economy over the past 20 years. The bursting of the stock market''s bubble followed years of corporate restructuring and innovation. Boards seeking maximum value from the changes often offered executives generous incentives, including stock options. Some executives manipulated boards for personal gain. The result: universal indignation and both regulatory change (new governance guidelines from the New York Stock Exchange and NASDAQ) and legislative change (the Sarbanes-Oxley Act of 2002). Is corporate governance so in need of help? The belief that unbridled executive compensation has hurt the stock market irreparably and that investor confidence must be restored is not supported by the facts. The US stock market outperforms those of other countries over long horizons, and even after the scandals it performed no worse than other stock markets. Moreover, two decades of restructuring (and executive incentives) have led to valuable productivity gains. Why has the US stock market performed so well over the long term? Although nongovernance factors have almost certainly played a role, it is likely that improved governance and incentives have contributed as well. Because CEOs have more equity ownership than they did 20 years ago, they care more about stock prices. Institutional investors have become increasingly important and are more likely to push for higher stock returns. And boards have become more independent. In other words, the US corporate governance and compensation systems are far from hopeless. The scandals have merely exposed weaknesses. The NYSE and NASDAQ guidelines and normal market responses have the potential to make a good corporate governance system better. At the same time, boards are providing better oversight and better thought out executive compensation contracts. A system designed to eliminate all excessive behaviour would pose far greater risks than the behaviour itself. The Draconian regulations required would foster inordinate caution and suppress experimentation at a time when we need more organisational experimentation than ever to take advantage of new information and communication technologies. Enron was an experiment that failed. We learn from the failure not by withdrawing into a shell, but rather by improving control structures and corporate governance in a way that allows continued experimentation - and occasional failures. Bengt Holmstrom is Paul A Samuelson Professor of Economics at the MIT Department of Economics and MIT Sloan School of Management. Steven N Kaplan is Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Graduate School of Business.