ABSTRACT This paper develops a “self-enforcing” approach to drafting corporate law for emerging capitalist economies, based on a case study: a model statute that we helped to develop for the Russian Federation, which formed the basis for the recently adopted Russian law on joint-stock companies. The paper describes the contextual features of emerging economies that make importing statutes from developed countries inappropriate, including the prevalence of controlled companies and the weakness of institutional, market, cultural, and legal constraints. Against this backdrop, we argue that the best legal strategy for protecting outside investors in emerging economies while simultaneously preserving the discretion of companies to invest is a self-enforcing model of corporate law. The self-enforcing model structures decisionmaking processes to allow large outside shareholders to protect themselves from insider opportunism with minimal resort to legal authority, including the courts. Among the examples of self-regulatory statutory provisions are a mandatory cumulative voting rule for the selection of directors, which assures that minority blockholders in controlled companies have board representation, and dual shareholder- and board-level approval procedures for self-interested transactions. The paper also examines how one can induce voluntary compliance and structure remedies in emerging economies, as well as the implications of the self-enforcing model for the ongoing debate over the efficiency of corporate law in developed economies.
[Kraakman, Black, & Tarassova 1999] Russian privatization & corporate governance: what went wrong?
ABSTRACT In Russia and elsewhere, proponents of rapid, mass privatization of state-owned enterprises (ourselves among them) hoped that the profit incentives unleashed by privatization would soon revive faltering, centrally planned economies. The revival didn’t happen. We offer here some partial explanations. First, rapid mass privatization is likely to lead to massive self-dealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastructure for controlling self-dealing. Russia accelerated the self-dealing process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, and used their wealth to further corrupt the government and block reforms that might constrain their actions. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren’t privatized, since self-dealing accompanies privatization, it politically discredits privatization as a reform strategy and can undercut longer-term reforms. A principal lesson: developing the institutions to control self-dealing is central to successful privatization of large firms.