No risk, no reward. That has been the guiding principal for business since the invention of barter. But these days the appetite for risk appears to be on the decline. Why? Blame the harsher regulatory regimen post-Enron … or the rash of bitter prosecutions targeting top executives … or the new auditing obstacle course called Sarbanes-Oxley.

The climate for publicly held corporations is definitely chilly. No wonder many of them are going private – and no wonder scores of successful private firms have scrapped plans to issue IPOs. Why take the risk of something happening (trouble with the SEC, a run-in with an ambitious prosecutor) that could leave the company’s reputation in tatters? The same goes for first-rate managers. Why join the board or take a top spot in a public corporation if it means putting your career at risk?

“Hear that noise? It’s the giant sucking sound of capital and talent exiting the public realm,” commented Business Week regarding the advantages of taking companies private.

Bottom line: When companies shun the public capital markets for fear of over-regulation, over-prosecution and over-exposure, they lose access to trillions of investment dollars. Cut off from those resources, companies will grow more slowly, hire fewer workers and return less to investors.

Consider the example of insurance giant AIG, on whose board I once served. The publicly held company has been thrown into turmoil since last year over allegations of accounting improprieties. While I can’t comment on the specifics of the AIG case, having left the board over five years ago, I can say that not a single one of these charges have been proven in a court of law – even AIG’s recent $1.64 billion settlement with regulators involved no admission of wrongdoing. In the meantime, AIG’s top management was summarily tossed overboard, casting the company into a period of uncertainty, depressing its stock and possibly placing its standing as the world’s leading insurer in jeopardy.

I can also say that while there, I saw a company that took great care to ensure its accounting practices were accurate and proper. To that point, of all the CEOs I have ever worked with, Hank Greenberg – who was ousted from AIG last year – paid the most attention to his company’s internal and external audits. AIG execs who failed to meet his high standards for fiscal and operational integrity were disciplined or removed.

Greenberg is a tough, entrepreneurial and immensely successful businessman who has produced more wealth for more shareholders than nearly any other U.S. executive in the last 40 years. That, of course, made him a high-visibility target for investigators and the media.

Unfortunately, Greenberg’s has become a cautionary tale for what can happen when an executive is willing to be aggressive and take risks in order to make his company prosper. The moral: Stick your neck out too far and it could get lopped off. That’s what it means these days to operate within the fishbowl of a publicly held corporation.

At the same time, regulators now know that just the threat of an embarrassing lawsuit or the release of potentially damaging allegations – whether true or not – can bring a public corporation to its knees. Fearing a hit to the company’s stock price or a loss of customers, management usually caves in, agreeing to pay a steep settlement to get the controversy behind them. And if the government orders you to give your CEO the hook or else – as was the case with AIG – you do that, too.

For those involved in running America’s public corporations, the message is clear: Keep your head down – or, better yet, go private and stay out of harm’s way. For the economy, sadly, that means less growth and less opportunity. But that’s what happens when regulators and prosecutors turn the risk-reward principle on its head.

Mr. Phypers is a former chief financial officer of IBM. He has served on the boards of AIG and Bethlehem Steel.