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 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.

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