Controlling the Corporate Controller’s Misbehaviour
Alessio M. Pacces
Erasmus School of Law, Erasmus University Rotterdam - Rotterdam Institute of Law and Economics; European Corporate Governance Institute
November 30, 2010
Journal of Corporate Law Studies, Vol 11, pp. 177–214, 2011
The corporate governance debate mainly deals with the effectiveness of techniques to protect shareholders from the controllers’ misbehaviour. This article takes a different approach. Focussing on self-dealing, it shows that effective strategies to protect investors from expropriation differ from country to country. However, 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 article shows that both the US litigation-based model and the UK governance-based model are effective against expropriation, but their efficiency can be improved. In light of this, this article recommends restricting the influence of non-controlling shareholders to the selection of a minority of independent directors, whose task should be limited to monitoring and validating self-dealing.
These findings can be extended from self-dealing to similar conflicts of interest that may lead to expropriation of shareholders, and to their regulation in other jurisdictions.
Number of Pages in PDF File: 47
Keywords: economic analysis of law, self-dealing, discretion and accountability, enforcement, shareholder litigation, institutional investors, independent directors
JEL Classification: G38, K22, K42Accepted Paper Series
Date posted: May 15, 2010 ; Last revised: August 31, 2011
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