Corporate governance

Having discussed the history and development of the rule of law and rechtsstaat, and their relationship with economic freedom and development, this chapter describes the two primary views of corporate governance: shareholder theory and stakeholder theory. The former is a common law position that developed out of case law. The latter presents more of a collective view, is predominant under civil law theory, and has been mandated by legislation in the European Union and elsewhere. The advantage of the common law corporate structure is the democratization of ownership, wherein a wide spectrum of society invests in, and thus provides capital for, corporate development. Corporate ownership in civil law jurisdictions involves a much smaller segment of society, often with interlocking directorates and partial governmental ownership; and the focus of the directors may be on maintaining jobs rather than maintaining or increasing profitability. Regardless of which legal system applies, however, corporate problems such as fraud, bribery, and crony capitalism afflict companies in both common law and civilian jurisdictions. After considering corporate scandals in both Germany and the United States, the chapter outlines some of the measures implemented to try to prevent or discourage them and encourage corporate social responsibility. It concludes that, in order to maintain the goals of liberty, entrepreneurship, and economic freedom, corporate governance should be as free from legislation and regulation as possible, with the law stepping in only when there is an indication of fraud or malfeasance. Contrary to contemporary theories about using regulation and enhanced reporting requirements to prevent corporate malfeasance, it is best for both the rule of law and economic freedom to encourage “soft law,†and let the market punish corporate inefficiency, ineffectiveness, and amoral acts short of criminal behavior. Law cannot stop people from doing bad or force them to do good; it can only deter, punish, and reward.