Conflicts of Interest: Disclosure, Incentives, and the Market

Abstract

Conflicts of interests are at the heart of numerous problems in business and finance. The law has not ignored them. The obligation to avoid or manage them finds its roots in the duty of loyalty. This duty is common to both the Anglo-American and Continental European legal traditions. Although the doctrinal foundation may vary from one system to another - from a fiduciary position or a statutory provision to an express or implied contractual obligation - the core is equivalent. Moreover, regulators are increasingly using the instruments of administrative law to expand the scope of this duty and systematically enforce it. As this paper, an introduction to a book collecting original papers from lawyers and financial economists on conflicts of interests in corporate governance and finance, points out, while the rules on conflicts have expanded their scope, they have also lost their sharpness through the increasing recognition of waivers and redefinition of the duties of the agent. This trend does not eliminate the core concern relating to conflicts of interest but it draws the attention to the trade-off between integrity, on the one hand, and scope or quality of services, on the other. Thus, in corporate governance as well as in financial markets, the regulatory focus has shifted from a prohibition of conflicts of interest to a duty to manage them appropriately. This transformation is carried out through a large variety of institutional devices. We discuss the advantages and disadvantages of some tools such as incentive schemes and compensation, market mechanisms, organisational measures, and disclosure. We also consider how various forms of law enforcement, civil, criminal and administrative enforcement can be deployed to ensure an effective implementation of the regulatory policies relating to conflicts of interests.

Keywords: Conflicts of interest, duty of loyalty, executive compensation, disclosure, enforcement

JEL Classification: K11, K12, K22, K23, K4, G35, G38