!!Экзамен зачет 2023 год / Black and Kraakman - A Self Enforcing Model of Corporate Law

listing standards that impose governance requirements on listed companies.11 By contrast, regulation of the relationship between workers and companies, such as mandatory employee representation on the board of directors along the lines of German codetermination,12 or state support for employee ownership through tax benefits as in American employee stock ownership plans, is beyond the scope of this Article.

This Article also focuses on large companies where at least some shareholders do not work in the business. A well-drafted law, of course, must also consider the special problems of close corporations. The procedural protections that are appropriate for a company with 10,000 shareholders would be ludicrous and crippling for a tiny company with five shareholders who all work in the business.

I. The National Contexts That Shape Corporate Law

Five aspects of national context, in our view, shape and limit corporate law: the goals of corporate law; the sophistication of capital markets and related institutions; the sophistication and reliability of legal institutions; the ownership structure of public companies; and the cultural expectations of participants in the corporate enterprise. In this Part, we describe how these features interweave to form the context of corporate law in developed economies. We then demonstrate, using Russia as a case study, how these features differ markedly in emerging economies -- differences in context that require differences in company law.

A. Corporate Law in Developed Economies

11Similarly, British company law, for our purposes, includes statutory company law, the common law of fiduciary duty, the London Stock Exchange's listing standards and guidelines, and the City Code on Takeovers and Mergers.

12A brief word on codetermination, for those who think this issue too important to be excluded from our Article: we are not convinced that mandatory employee participation on boards of directors is a good idea even in Germany, where it began. Moreover, the effort to transplant the two-tier board to the Czech Republic has failed. Investors there care only about what they see as the "real" board -- the management board. See John C. Coffee, Jr., Institutional Investors in Transitional Economies: Lessons from the Czech Experience, in 1

Corporate Governance in Central Europe and Russia: Banks, Funds, and Foreign Investors 111, 152-53 (Roman Frydman, Cheryl W. Gray & Andrzej Rapaczynski eds., 1996) [hereinafter Coffee, Czech Institutional Investors]. Russia offers an especially weak case for mandating employee participation in corporate governance. First, employees in most privatized companies own ample shares to elect their own directors under our proposal for mandatory cumulative voting. Second, in Russia and other newly privatized economies, many companies must greatly reduce their work force to remain competitive. Current employees will often resist these changes. Third, under Communism, Russian company unions had symbolic value but no real power. They remain weak and often corrupt. The Russians with whom we have discussed codetermination find an assumption underlying codetermination -- that labor unions can aggressively represent the interests of employees -- amusing.

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Corporate law, as we define it above, is generally understood to have a largely economic function in developed economies. This function might be characterized as maximizing the value of corporate enterprises to investors and therefore (on the whole) to society, or as minimizing the sum of the transaction and agency costs of contracting through the corporate form.13 From this perspective, corporate law provides a set of rules (often default rules that can be varied in the corporate charter) that encourage profit-maximizing business decisions, provide professional managers with adequate discretion and authority, and protect shareholders (and to some extent creditors) against opportunism by managers and other corporate insiders.

But no one imagines that corporate law accomplishes these objectives by itself. Many other control mechanisms also limit departures from the profit-maximization norm. In the United States, for example, a competitive product market, a reasonably efficient capital market, an active market for corporate control, incentive compensation for managers, and at least occasional oversight by large outside shareholders all exert pressures on corporate managers to enhance firm value. Sophisticated professional accountants, elaborate financial disclosure, an active financial press, and strict antifraud provisions assure shareholders of reliable information about company performance. Sophisticated courts (such as the Delaware Chancery Court), administrative agencies (such as the Securities and Exchange Commission), and self-regulatory organizations (such as the New York Stock Exchange) keep sharp eyes out for corporate skullduggery.

These multiple private and legal controls shoulder much of the burden of protecting investors in public companies, so that the corporate law itself can tilt far in the direction of providing managerial discretion and enhancing transactional flexibility. Most American state corporate statutes (typified by Delaware's) have evolved into "enabling" laws, many of whose major provisions are default rules. Moreover, many of the mandatory rules in American corporate codes have survived because they are either unimportant, avoidable through advance planning, or match reasonably well what the parties would have chosen anyway.14 The statutes are accompanied by fiduciary doctrines that give the courts wide latitude to review opportunistic behavior ex post, but the courts generally punish only the most egregious instances of self-dealing or recklessness. All else is left to private institutions and the market.

B. The Goals of Corporate Law in Emerging Economies

13See, e.g., American Law Inst., Principles of Corporate Governance: Analysis and Recommendations

§2.01(a) (1994) [hereinafter Principles of Corporate Governance] (stating that, subject to certain constraints, "a corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain" (citation omitted)). There are important departures from this norm, such as German codetermination or the antitakeover provisions in some American state corporate laws. But these are seen as just that -- departures from an overall efficiency norm. We do not enter here the debate over whether corporate law can or should encourage companies to pursue goals other than profit maximization.

14 See Black, Is Corporate Law Trivial?, supra note 3, at 551-62.

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Corporate law in an emerging economy must address a broader set of goals, and operate within a far less evolved market and legal infrastructure, than corporate law in a developed economy. The paradoxical consequence is that the protective function of corporate law becomes more important precisely when fewer other resources are available to support that function.

Consider first the goals of corporate law in emerging economies. The efficiency goal of maximizing the company's value to investors remains, in our view, the principal function of corporate law. But the balance between investor protection and the business discretion of corporate managers needed to achieve this goal will be quite different in emerging than in developed economies.15 In addition, in countries that are emerging from heavy state control of industry, a second central objective is the political goal of fostering public confidence in a market economy and in private ownership of large enterprises.

The efficiency goal dictates that corporate law provide more investor protection in emerging than in developed economies, for several reasons. One is that insiders are likely to exercise voting control over most public companies. Such controlled ownership structures raise the obvious concern that the insiders, whether managers or controlling shareholders, will behave opportunistically toward other shareholders. In Russia, for example, the structure of mass privatization has led to the great majority of privatized public companies being controlled by management-led coalitions of managers and workers, which typically hold 51-75% of a company's voting shares. Outside shareholders -- including banks and investment (voucher) funds -- hold on average 15-20% of the voting shares, while the remaining shares are likely to be held by individuals, by other companies, and by a state property fund.16 This ownership structure presents a clear risk of opportunism toward outside shareholders.17 Although the

15 The corporate laws of emerging economies tend to reflect a different balance between enabling and restrictive provisions than do the laws of developed economies. The survey of advanced emerging markets in the Appendix shows that many of these countries have retained (in varying degrees) more substantive and procedural protections for outside shareholders and creditors than have developed economies such as the United States.

16 See Joseph Blasi & Andrei Shleifer, Corporate Governance in Russia: An Initial Look, in 2 Corporate Governance in Central Europe and Russia: Insiders and the State, supra note *, at 78, 79-82 (reporting a survey of 200 privatized Russian companies that shows mean (median) employee ownership of 65% (60%)). For background on Russia's privatization scheme, see Anders Aslund, How Russia Became a Market Economy 223-71 (1995); Maxim Boycko, Andrei Shleifer & Robert Vishny, Privatizing Russia 69-123 (1995); and Maxim Boycko, Andrei Shleifer & Robert W. Vishny, Voucher Privatization, 35 J. Fin. Econ. 249, 256-65 (1994) [hereinafter Boycko, Shleifer & Vishny, Voucher Privatization].

17 A recent example in which even sophisticated investors were hurt was a large stock issuance (roughly doubling the number of outstanding shares) by the Komineft Oil Company, which had been among the most popular Russian stocks among foreign investors. The new shares were sold in early 1994, principally to the managers and employees of Komineft, at far below market value, but the issuance was not publicly announced until six months later. The issuance heavily diluted the interests of large shareholders who invested in

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particular form of controlled ownership in Russia may be unique,18 experience teaches that family-controlled companies with minority public participation -- the classic ownershipstructure in newly industrialized economies -- also require strong minority protections.19

Outside investors, facing ex ante a high risk of insider opportunism, will insist on a high expected rate of return in the cases when insiders turn out to behave properly, to compensate for the risk of bad behavior. In an extreme case like Russia, where the risk of insider opportunism is especially high (we explore below the multiple reasons for this), these rational discounts of share prices -- to far below the shares' fair value assuming good behavior -- can virtually paralyze the equity markets. Honest (nonopportunistic) managers won't offer shares at what they see as ridiculously low prices. Investors, meanwhile, won't pay more because they don't know which managers will misbehave. The risk of government misbehavior (such as renationalization, currency controls, or confiscatory taxation) further increases the gap between managers' perception of their firm's value and market prices for the firm's shares. Russian companies that have sought to issue shares have found that investors are willing to pay only a fraction of the company's true worth.20

In theoretical terms, Russian companies operate in a market with a severe "lemons" (adverse selection) problem, in which only low-quality issuers are interested in raising equity capital at current prices. Strong minority protections respond to this problem by narrowing the range and reducing the likelihood of insider opportunism. Investors will then pay more for

Komineft before the issuance was belatedly announced. See Neela Banerjee, Russian Oil Company Tries a Stock Split in the Soviet Style, Wall St. J., Feb. 15, 1995, at A14. Efforts by the Russian Securities Commission to have the issuance cancelled failed: Komineft's management merely apologized to investors and promised not to make a secret share issuance again. See Julie Tolkacheva, Komineft Agreement Leaves Investors Cool, Moscow Times, Oct. 31, 1995, at 111.

18 In the Czech Republic, for example, mass privatization led to financial institutions (usually banks and investment funds) and financial-industrial groups holding controlling stakes in many large companies. See

Coffee, Czech Institutional Investors, supra note 12, at 112-13.

19 It is well established that, under an American-style enabling statute, controlling shareholders frequently extract private gains from corporations at the expense of minority shareholders, despite the market constraints discussed in section I.A. See, e.g., Michael J. Barclay & Clifford G. Holderness, The Law and Large-Block Trades, 35 J.L. & Econ. 265, 267-78 (1992); Stuart Rosenstein & David F. Rush, The Stock Return Performance of Corporations That Are Partially Owned by Other Corporations, 13 J. Fin. Res. 39 (1990); Roger C. Graham, Jr. & Craig E. Lefanowicz, The Valuation Effects of Majority Ownership for Parent and Subsidiary Shareholders (Oregon State Univ. College of Bus. Working Paper, Feb. 1996).

20 Two examples: first, in the one true Russian public stock offering to date, by the Red October candy company in 1994, relatively few investors were willing to buy at the offering price. See Janet Guyon, Russian Firms Face Fund-Raising Woes in the Wake of Privatization Explosion, Wall St. J., Apr. 17, 1995, at B6A. Second, the Russian natural gas giant, Gazprom, tried in mid-1995 to sell a roughly 10% stake to foreign investors, but withdrew the offer after discovering that the price investors would pay was far below outside estimates of Gazprom's true value. See Steve Liesman, Limits on Sale Damp Shares of Gazprom, Wall St. J. Eur., Apr. 3, 1995, at 11.

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shares, which will make higher-quality issuers interested in issuing shares. This will further reduce the ex ante likelihood of expropriation of investors' funds and further raise stock prices, until a new equilibrium is reached with higher share prices and a lower cost of capital.

To be sure, in a world of perfect contracting, without informational asymmetries, contracting costs, or naive managers or investors, appropriate protections for minority shareholders would emerge by contract, without the need for government fiat. In such an ideal world, marked by extensive disclosure and populated by savvy investors and issuers, corporate planners would have incentives to offer optimal investor protection through their charters.21 Sophisticated market intermediaries, such as investment banks, accounting firms, and law firms, would advise issuers on what disclosures and contractual protections to offer and would bond the reliability of the issuer's disclosures.22 After shares were issued, the same efficient capital market -- together with the product market and the market for corporate control -- would police company managements. As a consequence, corporate law could be substantially "enabling," even if insiders dominated public companies.

This description points to a second, more general reason why efficiency concerns favor a protective corporate law in emerging economies. The enabling model and its underlying assumptions about capital markets have both strengths and weaknesses in developed countries.23 But the assumptions that support the enabling model are clearly inapposite in emerging economies, where informational asymmetries are severe, markets are far less efficient, contracting costs are high because standard practices have not yet developed, enforcement of contracts is problematic because of weak courts, market participants are less experienced, reputable intermediaries are unavailable or prohibitively expensive, and the economy itself is likely to be in flux.

In recently privatized economies such as Russia, the contractarian base for the enabling model fails for a third reason: the initial structure of relationships among company participants

21 See generally Michael Jensen & William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305, 312-33 (1976) (arguing that entrepreneurs who sell equity bear the anticipated agency costs of equity).

22 For an account of the contribution of such informational intermediaries to the efficiency of American capital markets, see Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 Va. L. Rev. 549, 613-21 (1984).

23 The most eloquent American proponents of the enabling model are Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 1-39 (1991); and Roberta Romano, The Genius of American Corporate Law 86-91 (1993). For efforts to develop the limits of the enabling approach, see Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820, 1835-60 (1989) [hereinafter Bebchuk, Limiting Contractual Freedom]; Melvin A. Eisenberg, The Structure of Corporation Law, 89 Colum. L. Rev. 1461, 1471-515 (1989); and Jeffrey N. Gordon, The Mandatory Structure of Corporate Law, 89 Colum. L. Rev. 1549, 1554-85 (1989) [hereinafter Gordon, Mandatory Structure]. We do not enter here the debate on the proper limits on the enabling approach in a developed economy.

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arose from government fiat rather than private contract. The ownership structure and initial charters of privatized Russian companies were imposed by the privatization program, and the company's principal bank lenders were often selected before privatization began. These relationships were not negotiated by outside investors with an eye to their own self-protection.

Beyond the efficiency justifications for protective corporate law, political goals support strong shareholder protection in emerging economies. Political goals also shape the law of developed economies, but they are more important in economies where capitalism is less firmly rooted. Egregious opportunism or corporate scandals may erode the political legitimacy of private ownership of large firms, as well as support for the market economy generally.

Even if corporate scandals do not trigger a political maelstrom of populist reaction, they will damage investor confidence in an environment where disclosure is minimal and legal remedies are slow and uncertain. In Russia, for example, a few well-publicized cases of manager mistreatment of shareholders have seriously impaired the willingness of investors, especially foreign investors, to buy shares of Russian firms and surely contributed to the roughly 75% collapse in Russian share prices from summer 1994 through late 1995.24

Thus, the twin risks of a destructive political reaction to scandal and of investor overreaction to scandal are important negative externalities that become more serious as legal rules allow greater insider discretion. These risks justify stricter controls on abuse-prone activities than would be appropriate in a developed market -- doubly so because market and cultural controls on abuse of position are relatively weak in emerging economies.

A further political justification for protective corporate law emerges in mass-privatized economies such as Russia, where the government has transferred shares to employees or the general public for nominal consideration. Such a privatization program reflects, in part, a political bargain on how to distribute social wealth.25 The recipients of shares of privatized enterprises expect these shares to have real value. But in Russia, many citizens have been disappointed by the market value of their shares and the low dividends they receive. If these recipients also come to believe (often correctly) that insiders are getting rich at their expense by expropriating the cash flow of privatized companies, the political bargain will be breached.

24 See Julie Tolkacheva, Secret Takeover Unnerves Investors, Moscow Times, Apr. 5, 1995, at 1, 2 (reporting that Primorsk Shipping doubled its outstanding shares and sold the additional shares for a nominal price to an affiliate controlled by Primorsk's managers, and also that Far Eastern Shipping plans a similar action); supra note 17 (describing the secret share issuance by Komineft to insiders); infra note 31 (describing Krasnoyarsk Aluminum's erasure of a 20% shareholder from its share register).

25 See, e.g., Boycko, Shleifer & Vishny, Voucher Privatization, supra note 16, at 250-53.

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This can -- and in Russia, already has26 -- undermined popular support for further privatization and other reforms needed for a healthy market economy.

C. Legal and Market Controls in Emerging Economies

Even as the economic and political goals of corporate law in emerging economies favor a strong protective function, limitations on enforcement resources constrain how this protective function is discharged. Developed economies usually have sophisticated enforcement institutions that can implement complex, finely nuanced rules. Emerging economies have less sophisticated enforcement institutions, and hence need simpler, more easily administrable rules.

The most significant enforcement limitation is weak judicial enforcement.27 Several weaknesses in a judicial system can hobble the enforcement of corporate law in emerging markets. First, the substantive legal remedies available to judges may be ill-defined or inadequate. A simple but telling example in Russia is the absence of a rule permitting judges to adjust damages for inflation. Without such an adjustment, damage awards in a high-inflation environment will compensate for only a negligible fraction of the actual loss when paid some years later.28 Moreover, judicial procedures may be so cumbersome, or the court system so overtaxed, that timely judicial action may be impossible to obtain except in rare cases. Russia, for example, has no analogue to a preliminary injunction. Further, the judiciary may lack experience with corporate law cases,29 may be corrupt, or may be so ill-paid that skilled lawyers will not take judicial jobs.30

26 See, e.g., Can Yeltsin Win Again?, Economist, Feb. 17, 1996, at 43 (describing the Communists' political resurgence in Russia and President Yeltsin's subsequent decision to fire Anatoly Chubais, the architect of privatization and the last remaining prominent free-market reformer in the Yeltsin administration); Peter Galuszka & Rose Brady, The Battle for Russia's Wealth: Can Rich New Capitalists Weather a Popular Backlash, Bus. Wk., Apr. 1, 1996, at 50 (describing political backlash against the conspicuous wealth of new Russian tycoons).

27Our focus here is on civil enforcement of the rights and duties established by the corporate law. Criminal enforcement, which can also be relevant in the corporate context in extreme cases, suffers from additional limitations, including poorly paid, poorly trained, and sometimes corrupt investigators and prosecutors.

28An example: one of us is familiar with a contract case to recover 32,000 rubles brought in 1990, when the ruble-dollar exchange rate was around 1:1. The damage award was paid in 1995, by which time 32,000 rubles were worth around $7.

29 A senior member of the Supreme Russian Arbitrage Court (the Russian "arbitrage" courts exercise jurisdiction over commercial disputes) recently admitted, with unusual candor: "This share business is too complicated for us. We don't understand it. We have no laws to deal with it." Elif Kaban, Shares, Guns and Bodyguards in Russia's Courts, Reuters, May 14, 1995, available in LEXIS, News Library, Wires File.

30 For example, the Russian arbitrage courts have experienced little change in personnel since the demise of the Soviet Union. Current judicial salaries are as laughable as other official Russian salaries. A senior judge today earns around $100 per month, barely more than a subsistence wage. A competent judge can increase his

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If these weaknesses are present in an extreme form, judicial enforcement of corporate law will collapse -- as it largely has in Russia. But total breakdown is merely one end of a continuum. Courts may be able to enforce simple rules and resolve easy cases, at least some of the time. Just as the criminal law deters as long as the police catch some criminals, the corporate law can deter misbehavior as long as some misdeeds are remedied in the courts.31 Enforcement will be easier if courts can often resolve disputes by applying bright-line rules rather than broad standards.

In addition to having weak courts, emerging markets are unlikely to have administrative agencies that can handle issues, such as financial disclosure, that benefit from detailed rulemaking and administrative enforcement.32 Moreover, these markets lack the nonlegal enforcement resources found in developed economies, including self-regulatory institutions (such as the New York and London Stock Exchanges and the British Panel on Takeovers and Mergers) and private firms that protect clients against abuse and reduce informational asymmetries (such as investment banking, law, and accounting firms). Accounting rules in emerging economies are likely to be weak or nonexistent and administered by a commensurately undeveloped profession. Russia, for example, has rudimentary and sometimes bizarre accounting rules that were developed for state enterprises, and virtually no accountants with training comparable to that of American certified public accountants.33

In developed economies, disclosure is an important constraint on management behavior. Disclosure of management self-dealing can lead to formal enforcement. Disclosure of self-

salary by ten times or more by returning to the private sector as a lawyer -- leaving the incompetent and the corrupt to staff the judiciary.

31 For example, Russia's dematerialized system of shareholding, in which the company register is the only official record of share ownership, creates a risk that company managers will simply erase an unwanted shareholder from the shareholder register. The Russian lawyers whom we asked about this risk expressed confidence that such an effort would fail -- the shareholder could go to court and get her ownership interest restored. An important test of this belief involves Krasnoyarsk Aluminum. In late 1994, the managers of this reputedly mafia-controlled firm canceled the register entry for a foreign investor (also with some unsavory connections) who claimed to own 20% of the company's shares, and forcibly barred the investor's representatives from attending a shareholder meeting. See Russian Aluminum: King of the Castle?, Economist, Jan. 21, 1995, at 62. The subsequent lawsuit by the shareholder has not yet been resolved.

32 For example, the Russian Securities Commission was formally created by presidential decree only in November 1994. The Commission has a tiny budget and an almost nonexistent staff. See, e.g., Steve Liesman,

Roiling Stock: Shareholders Meetings in Russia Set Stage for Free-Market Fight, Wall St. J. Eur., Apr. 20, 1995, at 1 [hereinafter Liesman, Roiling Stock]. Its members include representatives of the Ministry of Finance and the Central Bank, both of which opposed the Commission's creation and continue to lobby for limits on its power. See, e.g., id.; Steve Liesman, Russia's Central Bank Appears to Call for Removal of Top Securities Regulator, Wall St. J., Sept. 8, 1995, at A6.

33 For an extreme example, the Russian Ministry of Finance, which issues accounting rules, requires companies to account for as profit (and pay taxes on) the excess of the sale price of shares over the nominal (par) value of the shares.

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dealing or business problems can also lead to market sanctions, such as a drop in stock price, reduced availability of credit, and difficulty in hiring employees. Embarrassment from public disclosure also exerts important discipline. For example, American boards of directors have many times replaced a poor CEO after -- but only after -- sharply critical stories appeared in the business press.

In an emerging market, disclosure, and thus its attendant benefits, is likely to be diminished or absent. Russia is an extreme case where market pressures work against good disclosure. A company that discloses its accounts honestly can find itself paying taxes that exceed 100% of pretax income.34 Small firms also face a severe risk of mafia extortion and know that the local mafia are avid readers of financial disclosures, the better to judge how much payment to demand. The supposedly confidential financial statements required by the tax laws, once given to the government, are often delivered to the mafia by corrupt officials. In this environment, investors do not even want the companies in which they invest to report profits honestly. The risk that managers will steal hidden profits is preferable to the certainty that the government or the mafia will take even more after honest disclosure.35

D. Cultural Norms for Manager and Large Shareholder Behavior

A further reason why developed countries can make do with weak formal corporate law rules is that managers and shareholders are embedded in a culture that discourages opportunism. In part, the culture reflects the underlying legal norms and the penalties for violating those norms. But cultural attitudes also exist independently of and reinforce the legal norms, so that formal enforcement is infrequently needed. Few American corporate managers doubt that they work for the shareholders, even if they and their shareholders sometimes disagree about what this concept means. More generally, most managers in developed countries routinely follow laws of all kinds and think of themselves as law-abiding.

Russia offers a marked contrast. Managers of Russian enterprises cannot follow the law and stay in business. They must lie about their income to the tax authorities; bribe the tax inspector, the customs inspector, the local police, and many other government officials; pay off the local mafia; and conduct business despite an intricate and often senseless web of rules. Not surprisingly, these managers often see corporate law as merely another obstacle, to be overcome in any way possible. Some managers have declared their corporate charter, or the

34 The principal cause of effective tax rates that can exceed 100% of pretax income is rules that limit which expenses can be deducted from revenue in computing pretax income. See, e.g., George Melloan, Russia Tailspins into a Laffer Curve Crisis, Wall St. J., Mar. 4, 1996, at A15 (reporting that, in Russia, wages above a specified (low) level are not deductible in computing pretax income). Developed countries also have rules limiting which expenses are deductible, but in much less extreme form.

35 See id. ("[E]ven those companies that are well run and are making a lot of money don't wish to audit themselves in keeping with international accounting principles because if they do the government will take what they are making away." (quoting Moscow investment banker Boris Jordan) (internal quotation marks omitted)).

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stock ownership of top management, to be "commercial secrets." Some lock unwanted shareholders out of shareholder meetings,36 conduct shareholder votes by show of hands (dominated by employees), or refuse to transfer shares if they don't approve of the new owner.37 Misconduct so basic is rare in developed markets, precisely because it would be instantly condemned as making hash out of the ground rules of the corporate form.

To be sure, every country has some cultural ground rules. Russian managers, for example, often refuse to record a transfer of shares, but they rarely simply erase an unwanted shareholder from the share register. Still, cultural understandings about proper management behavior are likely to constrain managers more weakly in emerging than in developed markets. The weaker the cultural constraints, the larger the role that corporate law must play.

The corporate law can respond to judges' and managers' lack of sophistication about how corporate managers should behave by making its requirements more precise. Vague standards will rarely be understood, and will rarely be followed even when they are understood. By contrast, explicit instructions are more likely to be followed and enforced, and over time can help to inculcate a sense of appropriate behavior in managers. Broad fiduciary standards can have long-term value in emerging markets because they can foster a managerial culture of duty to shareholders. In the near-term, however, the enforceable core of the law must be based on bright-line rules as much as possible.

II. A Self-Enforcement Approach to Corporate Law

Having surveyed the constraints under which corporate law in emerging markets must operate, we are ready to examine more closely what form the law should take. Some aspects of corporate law for emerging markets follow easily from the strong protective function that the law must discharge and the limited tools available to enforce it. Given the weakness of market and cultural checks on corporate insiders and the prevalence of controlled companies, the core rules should often be mandatory, rather than default provisions changeable by shareholder vote. Moreover, the law should consist, as much as possible, of relatively simple rules that can be understood and applied by corporate participants and judges alike.

When we turn to the task of designing specific rules, two general approaches are possible. One we term the "prohibitive model": a law that bars a wide variety of suspect corporate behavior in considerable detail. The second we term the "self-enforcing model": a

36 See, e.g., Liesman, Roiling Stock, supra note 32, at 12 (describing a Sovintorg shareholder meeting at which armed guards enforced management's decision to exclude certain shareholders).

37 An example of Russian attitudes toward legal rules is the reaction of one company to a privatization decree that required two-thirds of the board of directors to be non-employees. A company representative reported to an interviewer: "We fired our deputy director, and he was elected [to the board] as [an] outsider. After some time will pass, we will hire him back." Interview with company manager in St. Petersburg, Russia (Oct. 11, 1994) (transcript provided by Professor Joseph Blasi, Rutgers Univ.).

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