Controlling the Corporate Controller's Misbehaviour

Abstract

The corporate governance debate mainly deals with the effectiveness of techniques to protect shareholders from the controllers’ misbehaviour. This paper takes a different approach. Focussing on self-dealing, it shows that effective strategies to protect investors from expropriation differ, and some may be more efficient than others. The inefficiency of an effective discipline of self-dealing stems from the constraints it imposes on the discretion of controlling managers and shareholders. This paper shows that both the US litigation-based model and the UK governance-based model are effective against expropriation, but their efficiency can be improved. To this purpose, the paper recommends restricting the influence of non-controlling shareholders to the selection of a minority of independent directors, whose task should be limited, in turn, to monitoring and validating self-dealing. These findings can be extended from self-dealing to similar conflicts of interest that may lead to shareholder expropriation, and to their regulation in other jurisdictions.

Keywords: discretion and accountability, related-party transactions, enforcement, shareholder litigation, institutional investors, independent directors, disclosure, enforcement, standards of review, distribution of powers, discretion and accountability, shareholder litigation, independent directors

JEL Classification: G32, G34, K22, K42, L26