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The ostensible lack of effectiveness of the current multilateral initiatives to curb transnational bribery has engendered a lively debate about the relationship between domestic morality, transnational policy, economic efficiency, and the effectiveness of legislation in curtailing transnational bribery. This discussion has taken place under the rubric of the desirability of the extra-territorial prohibition of transnational bribery as an international policy goal. The main condemnation of the current efforts to regulate transnational bribery relates to the prevalence of transnational bribery despite extensive legal devices to control the practice. In these criticisms, domestic regimes seem too weak to pursue adequate regulation of their own while being ensconced in notions of sovereignty and jurisdiction, which hamper efforts to respond adequately to the cross-jurisdictional cooperation requisite to the effective regulation of transnational bribery.

 

There are several dimensions to the debate concerning the appropriate strategy for tackling transnational bribery. The first level of the debate concerns whether transnational bribery should be tackled on the demand or supply side. Elsewhere, I have advocated that a mixed strategy tackling both the demand and supply side would be appropriate. The second and more salient debate to the problem of transnational bribery concerns the appropriate strategy for tackling the supply side of transnational bribery. The question as framed by this debate is whether the supply side of transnational bribery should be tackled through extra-territorial prohibition (for instance, the United States punishing incidents of bribery that occur in Sierra Leone) or through host state regulation alone (the Government of Sierra Leone taking responsibility for cases of bribery that occur in Sierra Leone even if US corporations are involved). Commentators on the supply side of the debate and commentators on the demand side of the debate have argued for and against multilateral efforts to combat the supply side of transnational bribery, but the debate is presently stalemated and inconclusive.

 

The traditional non-consensus on the regulation of transnational bribery

From the perspective of some critics, the current multilateral initiatives are ill conceived and the initiatives are responsible for the failure to curb transnational bribery. Some of the proponents of the current multilateral initiatives, in contrast laud the current multilateral initiatives. They argue essentially that transnational bribery damages the quality of transnational relationships, thus endangering global security and locate the inefficacy of the current multilateral initiatives in the level of enforcement of these initiatives. The relevance of this debate is that in seeking to answer the central question of this debate, both sides have proffered reasons for the failure of the current efforts to curb the prevalence of transnational bribery. Why the current multilateral efforts to regulate transnational bribery have failed to achieve this purpose is a central question with important ramifications for the international regulatory regime. The importance lies in the fact that without an adequate understanding of the reasons for the inefficacy of a particular transnational legal regime, it would be impossible to devise useful international regulatory regimes.

The arguments against the current multilateral initiatives

On an intuitive view, the regulation of transnational bribery would be best served by supply side multilateral efforts to combat transnational bribery using extra-territorial legal prescriptions. Salbu, the main opponent of the current multilateral efforts, makes two related provocative critiques of the current multilateral efforts to curb transnational bribery.[1] He argues that global attitudes about what comprises bribery are so varied that the extra-territorial application of anti-bribery laws creates both moral and political perils. The moral perils concern the danger associated with moral imperialism from the extra-territorial application of domestic laws. In this view, the imposition of laws across borders should be preceded by considerable transnational value consensus. Otherwise, the imposition threatens to deny respect for legitimate regional value variance.[2]

 

In Salbu’s view, cultures should be brought to convergence, if at all, by persuasion, rather than by fiat, and any form of extra-territorial anti-bribery legislation, even the most perfectly conceived, must be considered imprudent under current global conditions. More pertinently, Salbu argues that, while the ideal of a normative village may be enticing, the current condition is one of culturally pluralistic nations. Therefore, the ubiquitous transnational application of any one set of laws is dangerous. The peril of extra-territorial application is the risk of inflicting incongruent or discordant values on others in instances where legitimate, nuanced moral differences are supportable. [3]

 

The main arguments in support of the current multilateral initiatives

Nichols, a proponent of the current multilateral efforts to regulate transnational bribery, describes Salbu’s claim as unsupportable because it grossly misconstrues the nature of prohibitions against transnational bribery.[4] Nichols finds the moral imperialism argument proffered by Salbu troubling, and in particular, a subterfuge for perpetuating entrenched vested interests. He offers two arguments by way of rebuttal of the moral imperialism arguments proffered by Salbu. First, Nichols counters the moral imperialism charge against the extra-territorial prohibitions by observing that if a specific act is legal in the country in which it occurs, it cannot be prosecuted under the current multilateral prohibitions against transnational bribery. Second, given the general condemnation of bribery, respect for cultural differences should not be equated with respect for the corrupt practices of the minority that engages in bribery in a particular society.[5]

 

Setting the arguments against each other

Despite the intuitive appeal of these arguments, Nichols misses the thrust of Salbu’s argument. Whilst most countries prohibit bribery, there is an enormous amount of discretion exercised by a state in the decision to prosecute a particular allegation of bribery. Unfortunately, the extra-territorial prohibition of transnational bribery impinges upon the host state’s discretionary authority to prosecute particular allegations of transnational bribery. Nevertheless, this flaw in the Nichols argument does not imply that the broad proposition put forward by Salbu is correct.

 

Salbu’s second argument, relating to political perils, questions whether the growing consensus on the harmful effects of transnational bribery is enough to justify the adoption of extra-territorial restraints.[6] His concern is that regardless of how many countries eventually join in the present multilateral efforts, the attempts of one sovereign to moderate activity within the borders of another will always pose the risk of disagreements, resentment, and conflict. In this view, current multilateral efforts are too seriously flawed to be considered prudent legislation as they not only attempt to criminalise the acts of foreigners in foreign countries, but also attempt to monitor transactions that occur within foreign boundaries, which host countries are likely to want to control themselves.

 

Nichols counters that there is no evidence to suggest that extra-territorial control of transnational bribery leads to global disharmony, or decreases the level of commerce among states.[7] This is because the criminalisation of transnational bribery neither presents a new set of laws nor regulates the conduct of host country governments. Further, the criminalisation of transnational bribery neither dictates the behaviour of foreign government officials nor other foreign entities. The prohibition applies to citizens of states enacting the legislation, an exercise of the nationality principle, well established and uncontroversial under international law.

 

This view is again contested by Salbu who locates potential tension in the fact that signatory countries are outlawing extra-territorial bribes throughout the world, and not just in their own countries.[8] Salbu argues that the rest of the world, on the other hand, have not agreed to the intrusion but is nevertheless subjected to it. Nichols concludes that Salbu’s view has little room for communities not coincident with political borders, and has little consideration for the myriad of threats that are not the product of state interaction.[9] Salbu surmises that global pluralism undermines efforts to successfully regulate transnational bribery and that the current multilateral efforts cannot avoid moral imperialism simply by virtue of their multilateralism.

 

Geographical morality as a source of distrust among nations – a 3rd argument

Ala’i ascribes morality, albeit geographic morality, to the inefficacy of the current multilateral attempts to curb transnational bribery.[10] This notion of geographical morality is defined by Ala’i as the norm by which citizens of developed states are permitted to engage in acts of corruption in developing states without the attachment of moral condemnation. Ala’i attributes the past failures of multilateral or transnational initiatives to curb bribery to the legacy of colonialism and geographical morality, which have sown the seeds of distrust between the North and the South and concludes that the current anti-corruption initiative cannot escape the legacy of geographical morality. The moralists used the principle of geographical morality during the colonial era to justify acts of corruption in the colonies. In the post-colonial era, justification for corruption was based on the revisionist discourse on corruption, which cited development and tolerance for local cultures and values as the basis for continued acts of corruption. The amorality of the revisionist approach to corruption allowed transnational corporations and others to hide behind cultural relativism in order to justify their involvement in corrupt acts, including bribery of public officials in the former colonies.

 

In Ala’i’s view, the recent rejection through multilateral initiatives of cultural relativism has failed to unseat the deep-rooted distrust created and sustained by the historical link between the topic of corruption, including anti-corruption discourse, and the exploitation of developing countries. Ala’i concludes that current multilateral efforts are destined to fail since they perpetuate the legacy of the rule of geographical morality by adhering to its divisive view.

Deconstructing the multiple facets of the complicated discourse

The question for policy makers as framed by the above debate is whether the use of multilateral initiatives to combat transnational bribery is likely to bring about a reduction in the incidents of transnational bribery. Both the proponents and opponents of the current multilateral efforts have opposing views, which share fundamental assumptions about the desirability of curbing transnational bribery. The two views differ only in their assessment of the cause of the inefficacy of the current multilateral regime and therefore in the preferred policy approach to regulating transnational bribery. The position taken by this author is that neither explanatory model by both sides of the debate convincingly demonstrates the reasons for the failure of the current multilateral efforts to regulate transnational bribery.

 

In many respects, the debate is inconclusive. The opponents of the multilateral initiatives tend to overstate the problem: the multilateral initiatives alone cannot be the cause of the inefficacy. Given the increase in the level of cooperation through the various multilateral efforts to curb corruption, the theory of state interaction in the transnational arena has evolved from the model of competition reflected in the approach of the proponents of the multilateral efforts to curb the problem of transnational bribery. The opponents of the multilateral initiatives also tend to overplay their preferred solution of strengthening domestic capacity: Strengthening domestic capacity alone will not increase the efficacy of the regulatory regime.

 

The Critique of current systems is based on an outmoded concept of State interaction

The rationale of the opponents of the current multilateral efforts is based on a model of state interaction that presumes that this interaction is characterised by competition among the various states over regulatory capacity. According to this paradigm, states are engaged in a continual process of competition over the legitimate exercise of regulatory capacity over transnational bribery. The position taken in this paper is not diametrically opposed to this view in that it recognises the significance of the domestic regulatory regime and the predictions regarding the efficacy of the current multilateral efforts, in line with the opponents of the current multilateral efforts, but disagrees with the reasons advanced for the inefficacy of the current multilateral regime. The point of departure for this paper lies in the assertion that the lack effectiveness of the current multilateral framework is caused by the attempts by developed countries to impose their moral values on developing countries through extra-territorial anti-bribery laws.

 

The leap made by the opponents of the current multilateral efforts from highlighting the dangers of moral imperialism, a legitimate concern, to a reinforcement of the state sovereignty paradigm as the flaw in the current multilateral efforts is unjustified. It is one thing to critique the current state of regulation; it is quite another to demonstrate that a different system will prove superior. Salbu attempts to explain why host state regulation would be more effective. First, he identifies the critical question, as to whether host state regulation would be more effective than the current multilateral efforts to regulate transnational bribery, and answers the question in the negative. This analysis misses an important point. First, he misidentifies the critical question, which should not focus on whether the host state regulation would be better, but whether the multilateral efforts would be worse than host state regulation. His analysis completely ignores the significant and analytically crucial possibility that host state regulation and multilateral efforts may interact and that multilateral efforts may actually strengthen host state regulation.

 

In addition, opponents of multilateral initiatives ignore the norm building functions of transnational prescriptions

 

Second, Salbu’s main critique of the current multilateral efforts can be described as a criticism based on a lack of consensus on the normative foundation for regulating transnational bribery. In this norm driven criticism, Salbu sees a lack of shared ideas on corruption between the developed and the developing countries as the reason for the inefficacy of the multilateral efforts. This view though ignores the focus on the lack of shared ideas and in essence fails to take into account the very important social function played by norms in the process of regulating transnational bribery. In this view, legitimacy and its perception should not be understood as a bar to effectiveness, but rather, legitimacy is a norm or value that influences the compliance and in turn the effectiveness of the transnational legal prescriptions against bribery. Absent the internalisation of these norms, there is very little hope of these norms becoming embedded in domestic legal systems, a process critical to the effectiveness of these transnational prescriptions.

 

Proponents of the multilateral initiatives offer an incomplete blue print

The proponents of the current multilateral initiative on the other hand tend to understate the problem: they advocate a transnational regulatory regime without fully exploring its relational and process characteristics. The proponents also tend to avoid sustained consideration of solutions by failing to spell out the essential characteristics of how the proposed transnational regulatory regime would work in practice. These broad assertions are based on the following premise. To address the shortcomings of the state competition model expounded by the opponents of the multilateral initiatives, the proponents of the current multilateral efforts posit, based on a game theoretical model, that the rational pursuit of self-interest is a key determinant in shaping the enforcement of the current multilateral initiatives. In this view, the State as rational strategic, interdependent, decision-making actors determine the level of compliance in any area of cooperation.[11] These states, as rational actors, choose their level of compliance with the multilateral efforts to curb transnational bribery.

 

Although the game theory approach, advocated by the proponents of the current multilateral efforts, was developed to address the shortcomings of the state competition model, accepting this model would constitute a conceptual step backwards. As a descriptive model, characterising states as rational actors who determine their own levels of compliance and enforcement of transnational bribery prescriptions fails to capture the essence of observable phenomena in the regulation of transnational bribery. For instance, there is no indication that there is any difference between the numbers of bribes paid by either US or Japanese corporations or changes in the levels of bribes paid despite the very different enforcement strategies of these two states. This is because the regulation of transnational bribery presents regulatory challenges that are not purely administrative or cost based.

 

 

Fostering a deeper understanding of interaction between multilateral initiatives and domestic regulation

 

The argument put forward here suggests that the vociferous exchanges over the use of multilateral initiatives in the regulation of transnational bribery have produced a polarized set of alternatives that fail to capture the essence much less the complexity of the problem.

Monitoring compliance is particularly bedevilled with problems associated with information asymmetry. International cooperation in the regulation of transnational bribery by states differs from other more traditional areas of cooperation amongst states an important regard – monitoring the level of commitment by developing countries to enforcing transnational bribery prescriptions. In other more typical areas of cooperation, reciprocal action on the part of some states may induce or sustain compliance by other states with the commitments over time. Although this marked reciprocity might sustain cooperation between developed states in terms of enforcing these transnational prescriptions, the incentives for reciprocity do not extend to the developing countries that are the site of most cases of transnational bribery. This ensures that commitments by developing countries to curb transnational bribery and their violations cannot be effectively deterred by the threat of retributive violation by developed countries.

 

There are also problems associated with cooperation even among the developed states. Some problems requiring international cooperation are more transparent than others and are therefore capable of being monitored, making the monitoring of effectiveness easier. Transnational bribery, however, is not one of those problems. This ensures that one of the central variables to valuable monitoring of the effectiveness of transnational legal prescriptions, reputational concerns, is absent. Another variable in determining the level of effectiveness concerns the relational gains among the various signatories to the transnational prescription. States in which the adequate regulation of transnational bribery would require pervasive and costly domestic regulatory activity are less likely to be less successful in their efforts to curb transnational bribery.

 

 

Bringing it all together

Above, I have broadly categorized the primary explanations that have been put forward to explain the failure of the current multilateral initiatives to regulate transnational bribery by corporations into two camps. The opponents of the current multilateral initiatives whose principal premise is that the current multilateral initiatives are ineffective because of the risk moral imperialism engendered by the extra-territorial application of domestic laws and the attempt to impose transnational value convergence where none exists. The proponents of the current multilateral initiatives whose main premise is that the current multilateral initiatives are ineffective due to the lack of enforcement of these initiatives. The limitations of the explanatory models of both the proponents and opponents of the multilateral initiatives at a minimum imply that we disentangle the semantics of the debate by critically analysing the underlying causes for the failure of current multilateral efforts to stem the incidents of transnational bribery.

 

Our view rests on a simple premise. The last twenty years have witnessed an intensification of the articulation of a shared vision on the appropriate economic, political and legal strategy for the transnational community in the regulation of transnational corruption. The intensification represents tacit acceptance that given the transnational nature of modern business transactions, stemming corruption cannot be the preserve of domestic legal systems alone. Given that the domestic legal systems that are the site of these corrupt are often experiencing periods of transition, the peculiar cross-jurisdictional problems associated with the regulation of transnational bribery puts an additional strain on the already weak capacity of the domestic legal systems capacity to respond to corruption.

 

The regulation of transnational bribery is largely about domestic regulation and regulatory structures and the differences among states in their understanding of the standards set in the multilateral initiatives. More importantly, even in instances where there is consensus on shared ideas, evidenced by states complying with multilateral legal prescriptions, overt compliance tells us very little about the level to which the norms have been internalised. As I have argued elsewhere, the level of compliance with the multilateral conventions prohibiting bribery tells us very little about the effectiveness of these transnational prescriptions and therefore offers little guidance in terms of the goal of reducing the prevalence of transnational bribery. In this regard, any meaningful effort to curb the prevalence will have to perform a deeper analysis of the causal relationship between the underlying legal system and the level of effectiveness of the bribery conventions.


[1] See Salbu, S. [1999d]: ‘Extraterritorial Restriction of Bribery: A Premature Evocation of the Normative Global Village’. In Vol. 24 Yale Journal of International Law 223, at 226-227.

[2] Id. at 227. Also see Dalton, M [2006]: ‘: Efficiency V. Morality: The Codification of Cultural Norms in the Foreign Corrupt Practices Act’. In Vol. 2 New York University Journal of Law & Business 583, at 606-608, for a discussion of the problems associated with the application of corruption legislation across different cultural norms.

[3] Id. at 231.

[4] See Nichols, P [1999a]: ‘Are Extraterritorial Restrictions on Bribery a Viable and Desirable International Policy Goal Under the Global Conditions of the Late Twentieth Century?’. In Vol. 20 Michigan Journal of International Law 451 at 471.

[5] Id. at 472-473.

[6] Salbu [1999d: 226-227].

[7] Nichols [1999a: 454].

[8] Salbu [1999d: 253].

[9] Nichols [1999a: 457].

[10] See Ala’i, P [2000]: ‘The Legacy of Geographical Morality and Colonialism: A Historical Assessment of the Current Crusade Against Corruption’. In Vol. 33 Vanderbilt Journal of Transnational Law 877, at 881.

[11] See Davis, K [1999]: ‘Self-Interest and Altruism in the Deterrence of Transnational Bribery’. In Olin Working Paper No. 99-22, 1-56 at 48.

 

Two Types of Shareholder Litigation

There are two types of shareholder litigation.[1] Direct suits are actions brought by shareholders to redress harms inflicted on the shareholders directly typically by corporate officers. The derivative suit, in contrast, enables shareholders to obtain redress for harms inflicted on the corporation.[2] Although, the individual shareholder initiates the derivative suit, the action is brought on the corporation’s behalf and the corporation, not the shareholder, receives any recovery.

 

The Critical Distinction Between Both Types of Suits

The critical distinction between derivative suits and direct actions turns on the party who suffers the harm, a difficult distinction to make in most factual situations.[3] To maintain a derivative suit, the shareholders must allege that they have suffered injury to their interests because of injury to the corporation. The test applied by the court focuses on the nature of the injury and the claim is considered derivative if the corporation’s interests have been injured. The claim is considered direct if the interest of the shareholder that has been damaged.[4] Determining who has suffered the injury may be relatively straightforward in some cases; there are many situations where determining who has suffered the injury is ambiguous. For instance, where a minority shareholder alleges a breach of the duty of loyalty by a controlling shareholder, it is not clear whether the injury to the minority shareholder is direct or indirect. Since the decision of the Delaware Chancery Court in In re Caremark, Inc establishing that corporate directors have a fiduciary duty to establish monitoring systems to prevent, and when necessary correct, criminal misconduct on the part of corporate employees and agents, the potential for the use of derivative or direct suits in regulating bribery by corporations has increased. The recognition of the directors’ responsibility to establish monitoring systems opens the opportunity for shareholders to bring derivative actions alleging breach of a fiduciary duty.

 

Incentive Structure for Shareholder Litigation Against Bribery

The potential for both types of suit to curtail bribery by corporate offices is curtailed by the incentive (collective action) problems suffered by both types of suits. In view of the dispersed ownership characteristic of public corporations, most shareholders have a limited amount invested in any given corporation. It is therefore not cost effective for most shareholders to investigate and litigate specific instances of wrongdoing by corporate officers.[5] This problem has been partially ameliorated by allowing representative suits such as class actions. Nonetheless, in the direct suit, the fact that plaintiff’s recovery is limited to his damages creates a disincentive for the plaintiff to litigate corporate officers engaging in bribery. Similarly, there is a disincentive for the plaintiff to bring derivative suits because the recovery is for the benefit of the corporation and the plaintiff benefits only indirectly.[6] Although representative actions resolve one set of collective action problems, they do so at a price: they can create high agency costs and generate an entirely new set of collective action problems.[7] The major criticism of shareholder litigation is that the reduction of agency costs has intensified the collective action problems that are associated with any type of group litigation.

 

In the context of bribery by corporations, resolving one set of costs does not heighten the other set of costs. On the contrary, the use of shareholder litigation to curb bribery by corporations’ highlights the deterrence function performed by both derivative and direct suits. The central dilemma faced by the prospective role of shareholder litigation in regulating bribery by corporations is the tension underlying the proper balance between the positive management agency cost reducing effects of shareholder litigation against the collective action problems associated with shareholder litigation.[8] The most apparent error courts make is elevating compensation over deterrence in defining the mission of the derivative suit.[9] Many features common to the conduct of direct and derivative suits detract from the positive role of shareholder litigation in curbing misconduct by corporate officers.

 

The Misapplication of Shareholder Litigation

The social utility of shareholder litigation has also been affected by the view that shareholder suits are private suits intended to compensate injured investors. A recurring fallacy in the debate over shareholder litigation has been the preoccupation with the compensatory rather than punitive aspects of shareholder suits thus serving to obscure the suits’ expression of social values.[10] The academic debate, consistent with the compensatory goal, has been inclined to measure the value of shareholder suits by reference to the size of financial compensation.[11] By finding, as they do, that shareholder suits fail in their compensatory mission, these studies support a negative view of the social value of shareholder litigation. The special attention devoted to the goal of compensation by shareholder litigation actions tells us very little about the goal of deterrence generally. The focus of shareholder litigation is to address the problem of redistribution in a private contract, rather than the norm enunciating characteristics of these actions. In this view, compensating shareholders is a private matter, whereas deterrence is of public concern. The more squarely the objectives of shareholder suits are geared towards a compensatory function, the weaker the role these suits play in the condemnation of the misconduct underlying the shareholder actions. To the extent that suits are perceived as addressing purely private injuries, instead of being understood to address violations of the public interest in ways that cause private harms, the perception will be that derivative suits are but a subset of the standard commercial dispute between two warring financial interests. The extent to which shareholder litigation should play in role deterring wrongful conduct by corporate officers may be latent in existing doctrine, but plenty of room remains for serious consideration of these implications.

 

Indemnification Insurance – Another Hurdle

In addition to the lack of incentive by shareholders to litigate, corporate officers, and directors are shielded from most exposure to liability for damages through indemnification and insurance.[12] The availability of indemnification and insurance insulates corporate officers from most financial responsibility. Although these indemnification and insurance policies do not cover officers who are liable for wrongdoing such as bribery, there is a tendency for corporate officers to settle rather than incur liability from litigation. The settlement agreements can be drafted to insure conduct of the corporate officers meet the requirements for coverage. In fact, the vast preponderance of shareholder suits that survive pre-trial motions result in settlements, not judgments on the merits.[13] The deterrence effect of shareholder litigation for the misconduct of corporate officers would appear to be dampened by the prevalence of settlements within the bounds of available insurance from the carrier rather than the corporate officers.


[1] The case of Jones v. H.F. Ahmanson & Co., 460 P.2d 464, 470 (Cal. 1969) provides a detailed judicial exposition of the nature of derivative suits and distinguishes direct suits from derivative suits.

[2] Prunty, B [1957]: “The Shareholders’ Derivative Suit: Notes on Its Derivation”. In Vol. 32 New York University Law Review, 980 at 981-984 traces the historical development of derivative suits.

[3] Glenn G. Morris, [1995] Shareholder Derivative Suits: Louisiana Law, 56 La. L. Rev, 583 at 586-88.

[4] See Welch, J [1984]: “Shareholder Individual and Derivative Actions: Underlying Rationales and the Closely Held Corporation”. In Vol. 9 Journal of Corporate Law, 147 at 154.

[5] Empirical studies of derivative suit settlements suggest that attorneys, not shareholders, are the principal beneficiaries. See Romano, R [1991]: “The Shareholder Suit: Litigation Without Foundation?”. In Vol. 7 Journal of Law Economics and Organization, 55 at 63-65.

[6] See Cox, J [1999]: “The Social Meaning of Shareholder Suits”. In  Vol. 65 Brook. Law Review, 3 at 6.

[7] See Macey, J & Miller, g [1991]: “The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform”. In Vol. 58 University of Chicago Law Review, 1 at 8 n.6.

[8] Thomas, R & Hansen, R [1993]: “Auctioning Class Action and Derivative Lawsuits: A Critical Analysis”. In Vol. 87 North Western University Law Review, 423 at 427 recognise that collective action problems inherent in any effort to organise a large group of individuals into a common project.

[9] Some commentators have suggested that deterrence is the major reason for and principal effect of derivative suits. See Schwartz, D [1986]: ‘In Praise of Derivative Suits: A Commentary on the Paper of Professors Fischel and Bradley’. In Vol. 71 Cornell Law Review, 322 at 331.

[10] Cox for instance, has suggested that in the determining the primary purpose of the derivative suit, the goal of compensation has prevailed over deterrence. See Cox, J [1982]: ‘Searching for the Corporation’s Voice in Derivative Suit Litigation: A Critique of Zapata and the ALI Project’. In Duke Law Journal, 959 at 990.

[11] See for example Fischel, D & Bradley, M [1986]: “The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis”. In Vol. 71 Cornell Law Review, 261 and Romano, R [1991]: “The Shareholder Suit: Litigation Without Foundation?”. In Vol. 7 Journal of Law Economics and Organization, 55. However, an earlier study provides a slightly more optimistic report. See Jones, T [1980]: “An Empirical Examination of the Resolution of Shareholder Derivative and Class Action Lawsuits”. In Vol. 60 Boston University Law Review, 542.

[12] See Kraakman, R [1984]: “Corporate Liability Strategies and the Costs of Legal Controls”. In Vol. 93 Yale Law Journal, 857 at 861-62. He describes the scope to which officers and directors may be insulated from liability by indemnification and insurance.

[13] A 1992 study of 98 corporate and class action suits in the Delaware Chancery Court over a two and a half year period found that more than 95% of the preferred settlements were approved and approximately two-thirds of the attorneys’ fee applications were granted in full. See Berger, C & Pomeroy, D [1992]: “Settlement Fever”. In Sept.-Oct. Business Law Today, 7.

Fiduciary duties of directors and bribery

The regulatory regime for the internal organisation of the corporation in the US has traditionally been an exclusive function of State law. The State of Delaware in the US is the domicile of choice for most of the publicly listed corporations and the destination where most corporations incorporate in the US. The provisions of the Delaware statute focus on defining the duties and responsibilities of the directors and the relative rights of shareholders to constrain the actions of directors. These duty-based controls, such as the fiduciary duties imposed by statutes to constrain managerial discretion are monitored through the exercise by shareholders of their legal remedies to bring proceedings. The Delaware statute imposes very little by way of accountability obligations on the directors and officers of the corporation. For instance, there are no requirements regarding the qualification or independence of directors or obligations defining the duties of the corporate officers.[1] The statute establishes a set of default rules that can be changed by corporate organisers to fit their preferences, but has relatively little to say about the standards that directors and officers must adhere to or practices they must follow. Consequently, the standards accountability for directors in the discharge of their corporate responsibilities comes from non-legislative sources. These sources include listing standards such as those provided by the NYSE LSE and fiduciary duty obligations developed by the courts.

Statutory Framework for the Liability of Directors

The broad framework for the duties of the directors and officers of the corporation is laid out in the Delaware Corporate Law Statute. The statute provides that all the powers of the corporation should be exercised by or under the direction of the board of directors.[2] Despite the broad ambit of the powers given to the board of directors, there are statutory limitations to the powers of directors by the power of shareholders to vote, sue, and sell their stock. For instance, shareholder voting is required, not just to elect directors, but also as a prerequisite to mergers and similar transactions after directors have proposed them.[3] Other constraints on the powers of the directors are factual. For instance, despite the powers of shareholders to vote, sell, and sue, these powers are selectively utilised with very little impact on the control of the corporation.[4] Although shareholders can elect directors, they do not act for the corporation.[5] The Officers of the corporation act for the corporation on behalf of the directors as agents.[6] Although the officers of the corporation exercise the majority of the actions taken on behalf of the corporation, the provisions of the statute clearly subordinates the officers to the directors of the corporation.[7]

Fiduciary Duties Developed by the Court

Beyond the statutory provisions, the accountability of directors is governed by fiduciary duties imposed by the courts. Directors and Officers of corporations must comply with three basic categories of duties: the duty of care, duty to monitor, and the duty of loyalty. The duty of care applies to board decisions that do not involve conflicts of interest. The duty of care requires that the directors of the corporations discharge their duties in the honest belief that their actions are taken in the best interests of the corporation.[8] The scope of the duties of Directors includes the obligation to make decisions based on informed business judgment.[9] Directors are also obliged to be diligent in gathering and considering information that is material, or merely relevant, prior to making a decision, and should exercise reasonable care in the attention they give to the performance of their general responsibilities.[10] For many years, the courts described this duty in a manner that appeared to hold directors and other managers to the negligence standard.[11] The standard of the scope of the duty of care of the corporation’s directors is determined by the contours of the business judgement rule. The business judgment rule protects decisions made in good faith, on a fully informed basis, and in the best interests of shareholders. The court will presume that the decision of the directors was taken in the best interest of the shareholders unless the plaintiff rebuts this presumption. Rebutting the presumption does not result in per se liability.[12] Rather, rebutting the presumption shifts the burden to the directors to show the fairness of the transaction.[13] Rebutting the presumption requires a showing of gross negligence.[14] The business judgment rule and the high standard required to establish a breach of the duty of care ensures that directors are insulated from liability to the corporation or its shareholders as long as the actions taken is can rationally be related to a business purpose of the corporation.

Judicial Activism legislative restrictions

The Delaware courts have on occasion sought to expand the scope of the duty of care owed by directors. These attempts have however been restricted by the Delaware legislature through statute. In the case of Smith v. Van Gorkom, the Delaware Supreme Court expanded the scope of duty of care of directors by allowing a rebuttal of the business judgement rule when the officers and directors had not engaged in fraud or taken the decision for personal gain or bad faith.[15] In this case, the directors approved the sale of the corporation at a two-hour meeting, without advance notice and without seeing the final written agreement. According to the court, bad acts amounting to gross negligence brought judicial oversight over the transaction.[16] In effect, the court lowered the threshold for the duty of care from the very high gross negligence standard. The Delaware State legislature responded to the expansion by incorporating a provision that waives monetary damages for breaches of the duty of care into the corporate law statute.[17] The effect of the statutory provision is that in the absence of a violation of the duties of loyalty, good faith, or intent to harm the corporation or its shareholders, directors are now exculpated from private monetary liability for failures to adhere to their duty of care.

The Duty of Care and Bribery

The current scope of the duty of care is insufficiently developed to impose liability on directors in situations where officers engage in bribery. Under the standards of the duty of care established by the Courts, directors have no special obligations with regard to verifying the information supplied by officers of the corporation. In Solash v. Telex Corp. the court held that directors fulfil their duty of care by reviewing management supplied information in the standard manner, as long as they are unaware, and in the exercise of due care would not have been aware, of facts or discrepancies signalling the need for additional information.[18] The principal argument that has been advanced in favour of limiting the duty of directors is that requiring directors to verify information supplied by management would be inefficient and might create an adversarial relationship between directors and officers.[19] This limitation, combined with the business judgment rule and passage of Section 102(b)(7) limits the scope of the duty of care to regulate bribery by corporation. While the duty of care applies to decisions that do not involve conflicts of interest, the duty of loyalty primarily applies in situations where the directors have a financial interest in transaction. The existence of the conflict raises the possibility that the directors or corporate officers are engaging in self-dealing at the expense of the shareholders.[20] Similar to the duty of care, the duty of loyalty is restricted by the business judgement rule and the same gross negligence standard is used to determine whether directors are in breach of the duty.

The Duty to Monitor and Bribery

The duty to monitor actions of the officers of the corporation is another fiduciary duty that has broad potential to impose liability on directors for the actions of corporate officers engaging in bribe transactions. The Delaware Courts have imposed a specific duty on the part of directors to monitor the business affairs of the corporation. Under the duty of care, directors are not accountable for corporate wrongs in the absence of specific knowledge.[21] In the case of In re Caremark, the Delaware Court of Chancery sought to impose a fiduciary obligation on directors to put in place and monitor procedures to keep them informed about the activities of the corporation.[22] The case involved a derivative action against the corporation’s directors by the shareholders. The defendant, Caremark, was engaged in patient care.[23] The corporation derived most of its revenue from Medicare and Medicaid reimbursement. Under the Anti-Referral Payments Law, Caremark could not provide remuneration for the referral of patients by physicians. In violation of the prohibition, the officers of Caremark paid for referrals. The corporation eventually pled guilty to criminal charges. The shareholders argued that the directors had breached their duty to monitor by inadequately supervising the conduct of the corporate officers. Although the parties settled the proceedings, the Court in approving the settlement was of the opinion that if again faced with the issue, it would not follow an interpretation of the red flag test, which protected directors in all but overtly suspicious circumstances.[24] The Court indicated that the duty of oversight might require boards of directors to have monitoring and reporting systems to provide the board with “timely, accurate information sufficient to allow management and the board . . . to reach informed judgments concerning both the corporation’s compliance with law and its business performance”.[25]

Limitations of the Duty to Monitor

The application of the duty to monitor to the regulation of bribery by corporations is limited. First, the Caremark decision was taken in the Delaware Court of Chancery. Neither the decision nor its rationale ever received approval by the Supreme Court of Delaware. Second, the scope of the duty is limited by the fact that the directors would only be liable in the event of a systematic failure of procedures put in place to deter bribery. The standard requires that directors put in place procedures that keep them informed but did not cover the quality of the procedures instituted. There was thus very little incentive for directors to inform themselves by putting in place procedures to ensure that problems came to their attention. The directors had little incentive to seek other sources of information, which could increase their oversight obligations and legal exposure. [26]

Duties of other Corporate Officers

Corporate officers, as agents of the corporation, also have fiduciary duties to the corporation and shareholders similar to the duty owed by directors. Even though the relation between the officers and the corporation is governed by the contractual terms of the employment agreements, as fiduciaries, they owe several duties to the corporation that exist independently of contract.[27] Breach of these duties affords the corporate principal a host of remedies, including a tort action against the agent for losses caused by the breach.[28] The fiduciary duty of the corporate officer particularly relevant to the regulation of bribery is the officer’s duty of loyalty. This duty requires the agent to act solely for the benefit of the corporate principal.[29] The scope of the duty of loyalty is broad and precludes the officers from taking actions adverse to the corporation, or on behalf of one with interests adverse to the principal without consent, not competing with the principal, providing an accounting to the principal for profits.[30] The agency status of officers seems to have been more significant to the issue of whether, in a particular case, officers had the power to affect the corporation’s relationship with third parties than to the issue of the fiduciary duties owed by officers, as agents to the corporate principal. Relatively little litigation asserting breach of fiduciary duty claims against officers has been brought either by boards of directors or, derivatively, by shareholders. The scope of the fiduciary duty of corporate officers in the context of bribery has been limited by the fact that until the passage of an amendment the Delaware statute in 2004, the Delaware Chancery Court did not have personal jurisdiction over officers of corporations.[31]


[1] See Del. Code Ann. tit. 8, 141(b) (2001 & Supp. 2002) provides that the certificate of incorporation or bylaws may prescribe other qualifications for directors. See also 142(a) (2000) which provides that the corporation “… shall have such officers with such titles and duties as shall be stated in the bylaws or in a resolution of the board of directors which is not inconsistent with the bylaws … .”.

[2] Del. Code Ann. tit. 8, 141(a) provides that all corporate power “shall be managed by or under the direction of a board of directors”.

[3] Del. Code Ann. tit. 8, 141 (2001 & Supp. 2002).

[4] Thompson, R [1999]: “Preemption and Federalism in Corporate Governance: Protecting Shareholder Rights to Vote, Sell, and Sue”. In Vol. 62 Law & Contemporary Problems, 215, at 216.

[5] Del. Code Ann. tit. 8, 141(a) (2001) provides that the power of a corporation lies with the board of directors and officers who may be elected by the shareholders.

[6] Del. Code Ann. tit. 8, 142 (2001) outlines the duties and powers of officers selected by the directors.

[7] Most sections of corporation law codes are directed to the role of shareholders rather than to corporate officers. The main provisions directed toward corporate officers include Del. Code Ann. tit. 8, 142, which refers to officers and defers to the corporations bylaws or board resolutions as to what officers might do, how they are chosen, and how vacancies are filled, except for minimal default provisions, such as the provision that officers may resign at any time. Other provisions include Section 143, which addresses loans to employees and officers, and section 145, which includes officers, along with directors and others, as persons whom the corporation may indemnify.

[8] Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).

[9] Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)

[10] Aronson, 473 A.2d at 812 (Del. 1984).

[11] See Gelb, H [1998]: “Director Due Care Liability: An Assessment of the New Statutes, 61 Temple Law Review, 13 at 16,  who notes that there are few reported cases in which directors have been held liable for mere negligence.

[12] McMullin v. Beran, 765 A.2d 910, 916-17 (Del. 2000).

[13] See the cases of  Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1162 (Del. 1995) and Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).

[14] See the case of Brehm v. Eisner, 746 A.2d 244, 264 n.66 (Del. 2000) where the court noted that decisions reached through a grossly negligent process will not be protected by the business judgement rule.

[15] 488 A.2d 858 (Del. 1985).

[16] 488 A.2d at 864, 867-69.

[17] Del. Code tit. 8, 102(b)(7) (1988).

[18] Fed. Sec. L. Rep. (CCH) P93, 608, 97,727, 1998 WL 3587 (Del. Ch. 1988).

[19] Coffee, J [1977]: “Beyond the Shut-Eyed Sentry, Toward a Theoretical View of Corporate Misconduct and Effective Legal Response”. In Vol. 63 Virginia Law Review, 1099 at 1108.

[20] Brown, J [1991]: “Discrimination, Managerial Discretion and the Corporate Contract”. In Vol. 26 Wake Forest Law Review, 541, at 652.

[21] See Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (1963), where the court noted that absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to expect exists.

[22] In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).

[23] Caremark, 698 A.2d at 971.

[24] Caremark, 698 A.2d at 970

[25] Caremark, 698 A.2d at 970.

[26] The Court stated that good faith attempts to monitor management would not result in liability and that good faith would not be established through isolated examples of oversight failure, but only through sustained or systematic failure. Caremark, 698 A.2d at 970.

[27] Restatement (Second) of Agency 1 (1958).

[28] Id. 399.

[29] Id. 387.

[30] Id at 389-90, 391-92, 394, 393 and 388.

[31] Del. Code Ann. tit. 10, 3114 (2003).

The regulatory regime for corporations covers a wide variety of regulatory systems. The degree to which the State plays a direct role and the degree to which other external parties and the corporation itself has regulatory responsibility for its own actions varies. In surveying the regulatory framework for corporations, it is useful to have as a reference, a regulatory structure of direct command and control regulation by the State. Nonetheless, regulatory functions are often performed by other entities, which include specific governmental agencies, self-regulating organisations, or the corporation itself. In the classic command and control regulation, the level of State involvement is high and most often the State is the only entity involved in implementing the regulatory regime. The State’s exercise of its regulatory functions can be delegated or directly exercised through an agency or delegated to a self-regulatory body. Even in situations where the State delegates its regulatory functions to a self-regulatory system, the system still operates under a shadow of possible State intervention. Also included in the regulatory framework is the voluntary system of regulation in which corporations either individually or through industry organisations impose rules on themselves. The imposition of self-regulation could be done for a variety of reasons ranging from the desire to improve consumer confidence to forestalling regulation by the State that is more restrictive.

Corporate governance – a broad view

The conception of corporate governance adopted by this paper encompasses both the internal governance mechanisms of the corporation and the broader public regulatory framework in which corporations operate. This conception of corporate governance is used despite the fact that some academics have tried to draw a principled distinction between substance and process in the regulatory framework for corporations. In this distinction, corporate governance regulates substance while other areas of the law regulate process. Corporate governance is thus used in a general descriptive manner to refer to all of the structural attributes and processes that determine the nature and relationships among, corporate constituents. In this conception, the scope of corporate governance incorporates how corporations are managed and controlled, by whom and to whom legal duties are owed, and against who related liabilities might be assessed. A non-exhaustive list of these corporate governance issues would include the rules governing the decision-making procedures of directors and officers of the corporation, the duties, and liabilities of the directors and corporate officers. Also included in the list of corporate governance issues are the rules on the preparation of reports, regulations, and liability for the preparation of accounts, voting rules for meetings of the corporations’ directors, rules against insider trading, restrictions on related third party transactions, disclosure requirements, and mandatory notification requirements.

Corporate governance – a public/private dichotomy

Another principled distinction that has been made concerning the scope of corporate governance has been to characterise corporate governance as private in nature, in contrast with other areas of the law such as public securities law, which are public. This distinction is not very useful for this paper largely because rather than providing a normative distinction, it is merely descriptive of the relation between US Federal and State law. In the US, the regulation of the internal affairs of the corporation and thus, corporate governance is in most part a function of State law. Under US conflict of laws principles, the corporation’s state of incorporation is the governing law for that corporation. Federal securities laws on the other hand govern the framework for the regulation of securities. The federal securities law through registration and financial disclosure requirements, and broad anti-fraud provisions regulate the conduct of corporations. In contrast, corporate governance in the UK is highly regulatory and thus inherently public in nature. The corporate code contains detailed mandatory rules on finance, formation, insider trading insolvent trading prohibitions and related party transactions. Violation by corporate managers of these mandatory rules may result in criminal prosecution and penalties.

An all encompassing view of corporate governance

One meaningful distinction running through the non-exhaustive list of corporate governance issues and the public/private nature of corporate regulation is the distinction between the issues restricted to the relationship between the shareholders and managers of the corporation, and those that expand corporate governance to include a wider range of persons and structural roles associated with the corporate enterprise. At a fundamental level, there is tension between two competing visions of the role of corporate governance whether corporate governance should be concerned primarily with ensuring managerial accountability or with enhancing corporate conduct. While distinctions can be drawn between substance and process, and public law and the private governance activities internal to the corporation, corporate governance is itself a function of both private decisions regarding optimal management of the corporation, as well as public law notions of director and officer responsibilities. The broader definition of corporate governance utilised in this study therefore incorporates all the areas of regulation that directly affect the relationship between the various constituents of the corporation. Encapsulated within this broader conception of corporate governance is the merger of the distinction between the public and private sphere for the regulation of the corporation. For instance, this broader characterisation of corporate governance would include the regulation of insider trading because it affects the relationship between the directors and officers of the corporation and the shareholders of the corporation.

My view on corporate governance encompasses the relationships and ensuing patterns of behaviour between different constituents of the corporation. Also, included in this view of corporate governance is the external set of rules that frame and shape the relationship among the various constituents of the corporation. Although, the discussion on external regulation is limited to securities regulation, this limitation is simply because the rules of securities regulation are more relevant to the regulation of transnational bribery than other rules such as the rules on environmental protection, competition, and bankruptcy.

Conditions in a globally fragmented world 

Globalisation has been described as the intensification of social relations worldwide in a way that links distant localities and making sure that local activities are shaped by events occurring many miles away (Giddens, A [1990]). At the same time as globalisation, as part of a process called fragmentation, decision taking and lawmaking is becoming more localised (Picciotto, S [1997]). 

 

Intuitively, both processes, fragmentation and globalisation, are connected, but the nature of the interconnection is unclear. Fragmentation may be a dialectical reaction to globalisation – having decisions taken remotely causes communities to require a larger say in their immediate environment. Alternatively, fragmentation could be a complementary reaction to globalisation – where decisions requiring shared solutions are taken at the supranational level, while decisions with local consequences are taken at the local level. Regardless of the relationship between globalisation and fragmentation – either as a relic, dialectical reaction or complimentary phenomenon – one of the primary effects of both processes is their influence on the regulation of transnational conduct.

 

Regulatory arbitrage – exploiting cracks in the system

There are particular features of the interplay between globalisation and fragmentation that accentuate the difficulties with the regulation of conduct that cuts across national boundaries. Concerning the exercise of regulatory power, the interaction between globalisation and fragmentation has regulatory consequences of which the subjects of regulation are cognisant, and which influence the regulatory choices taken by states. Arbitrage in the context of transnational regulation suggests that the subjects of regulations may be able to take advantage of inconsistencies or differences the between the regulatory regime in two or more states to achieve a favourable result than would have been possible if their actions were regulated by one state.

 

It is not only the subjects of international regulation that exploit loopholes in the rules. States are also complicit as they compete by lowering their regulatory regimes to attract investment. The classic exposition of competition between states suggests that where there are two or more regulatory regimes and no barriers to mobility, regulatory subjects will choose to move their activities to the least restrictive regulatory regime. Therefore, to forestall the possible loss of investment, States interested in maintaining of increasing investment will reduce the regulatory burden on individuals. This model of regulatory arbitrage is hardly of universal application and once other variables that determine the location of corporations are taken into account, it is clear that there are other factors that determine the decision to move to an alternative state.

 

Solutions to regulatory arbitrage and their limitations

There are at least three theoretical solutions to the problems of regulatory arbitrage. The first option is to deal with transnational problems through the unilateral application of domestic laws. Although a potential solution to the problem of regulatory arbitrage, the unilateral application of domestic laws tends to exacerbate conflicts between States that have overlapping regulatory regimes over the conduct of regulatory subjects. Furthermore, some transnational legal problems, the bribery of foreign public officials being a classic example, are not amenable to unilateral solutions. The second alternative is to expand bilateral and regional cooperative arrangements. The limitation of use of these cooperative arrangements is that they only apply to the direct participants, which would often not include the states with whom cooperation agreements would be the most beneficial.

 

A third option, which happens to be the option favoured in the international community, is to harmonise national regulations through the establishment of unified international rules. This approach has several flaws, but I will list two obvious problems with this approach. The first problem is that even in instances where States are successful in their attempts to harmonise regulations, the fact that regulatory outcomes are dependent on a myriad of not only substantive but procedural rules, the right regulatory outcome cannot always be guaranteed. This problem is not unique to the regulation of transnational conduct and applies to any attempt to harmonise the regulatory regimes in disparate legal systems. The second problem concerns the effect of selective enforcement on transparency and predictability of legal rules. The harmonisation of regulatory regimes with disparate levels of enforcement by states is less transparent and predictable to the subjects of regulations than different regulatory laws. Thus, the harmonisation of rules may be less effective than the application of inconsistent regulations.

 

Rethinking transnational regulatory convergence

From a pragmatic point of view, the current framework for transnational regulation is structurally flawed and that the discourse around the effectiveness of the regulatory regimes only serves to distract from the actions required to bring about fundamental changes in the system. In other words, the discourse advocates for more less or no regulation and ignores the way in which multiple channels of interaction within our systems shape and sometimes undermine the very goals that they seek to achieve. In many respects, the challenge in getting diverse States with different cultures and interests revolves around not just differences in moral values, but also differences in what are considered the appropriate strategies and in the ultimate policy outcomes desired.

 

Over the last twenty years, the articulation of shared norms on transnational problems have intensified, moving rapidly (although not uniformly) towards a shared vision of the appropriate solutions. In most instances, given the diverse cultures and histories of players in the international community, reaching broad agreement on some fundamental issues has been difficult. The process of negotiating areas of disagreement attests to some degree of convergence in perspectives in attitudes across cultures. The convergence of perspectives could be attributed to the fact that in the international arena as elsewhere, shared problems often result in similar solutions. Equally as important as the agreement on these shared norms are the influences these shared norms are now likely to exert on the development of solutions in the domestic arena. In principle, the ideal would be the encouragement of the development of transnational principles, while permitting local communities to tailor the solutions that best fit their individual circumstances.

In recent years, the issue of transnational bribery has received considerable attention as a problem in the relationship between the developed and developing countries. In these discussions, the relationship, if any, between corruption and culture has invariably affected the arguments regarding the justification for the regulation of corruption in the transnational context. So that we are working of the information, rather than speaking about the broader concept of corruption, I will limit this particular discussion to bribery that occurs in the transnational context. Transnational bribery occurs when a person (legal or juristic) from one country bribes a public official of another country. It is impossible to determine the precise level of transnational bribery that occurs. It is therefore debatable whether the recent awareness about transnational bribery reflects an increase in the incidence of transnational bribery or is a reflection of the growing awareness of a situation that already existed. Notwithstanding, a 1997 World Bank estimate placed the total corruption involved in international trade at about $80 billion per year. A more recent estimate by the World Bank of the amount of bribes paid suggested a figure of more than $1 trillion dollars (US$1,000 billion) each year.

 

Even without a proper estimate of the levels of transnational bribery that occur, there is consensus on the fact that it is a problem that requires some form of regulation. This however is the extent of the consensus and the arguments justifying the regulation of corruption vary with some commentators attempting to justify the regulation of corruption by arguing that corruption is morally wrong and causes harm to others and the society as a whole. By contrast, others argue that there is no requirement to demonstrate harm because corruption conflicts with societal norms of fair play. Further, it is precisely because of the conflict between corruption and these societal norms that the criminal law is used to enforce societal standards by prohibiting corruption. What however happens when the incidences of corruption transcend societal barriers with differing standards, as is the case with transnational bribery?

 

Within this context of the efforts to regulate transnational bribery in general has been an informative debate about the relationship between domestic morality and transnational policy. This debate centres around the curbing of transnational bribery whilst ensuring that transnational legal prescriptions are not imposed on developing countries. Professors Salbu and Nichols, in a debate spanning over 10 articles, have each articulated extremes of the controversy over global moral community building.

 

Regulating transnational corruption – new age moral imperialism?

Salbu cautions against the imposition of values through extra-territorial prescriptions against transnational bribery because these prescription seek to make judgements regarding the appropriateness of gift giving in various cultures. Salbu’s argument is predicated on what he styles the premature attempt to create a global community, which evokes the kind of virtue-inculcating lessons that inspire a person to refrain from accepting or offering bribes. This premature attempt, he cautions, risks moral imperialism. Salbu accepts that a unified agenda and value convergence in the regulation of transnational bribery could emerge in the future, but argues that multilateral policies or extra-territorial application of unilateral policy should not precede such convergence. His general condition is that, when laws are imposed across borders, there should be considerable transnational value consensus. Otherwise, the imposition threatens to deny respect for legitimate regional value variance.

 

While Salbu’s critical appraisal of the premature attempt to evoke a normative global village might ring true, he however fails to mention when or how the value convergence on the regulation of transnational bribery should take place. More importantly, he fails to signify how one would appreciate that the value convergence has occurred.

 

New age moral imperialism? Rubbish, we all agree

Nichols, on the other hand, notes that all countries prohibit bribery of their public officials and that all cultures condemn the practice both legally and religiously ensuring that the risks of imperialism cautioned by Salbu are virtually non-existent. Nichols skilfully uses the fact that all countries prohibit bribery to emphasise the argument that the value convergence alluded to by Salbu does in fact exist. Nichols concludes that given such cross-cultural agreement and the fact that national legal systems determine whether a particular transaction constitutes bribery, the extra-territorial and transnational prohibition of the practice of bribery is the logical step in the regulation of transnational bribery.

 

Anti, the anti corruption campaign – a third way

In reviewing the two arguments, I recognize the necessity for the transnational regulation of bribery, but caution that the justification for the extra-territorial regulation of transnational bribery needs to be excised from its foundations in morality and based instead on notions of the overall benefits to society. This cautionary note is echoed by Kennedy who has characterised arguments such as Nichols’ call for the transnational regulation of bribery using extra-territorial prohibitions, as the foundation for the anti-corruption campaign currently being waged by the international community. Kennedy’s analysis seeks to answer the question whether one should, in the end, favour or oppose the campaign against corruption currently being waged by the assortment of institutions, policy-makers, and intellectuals.

 

In response to this question, Kennedy points to the lack of clear arguments among those who oppose the anti-corruption campaign and attributes this to the fact that opposition to the anti-corruption campaign might easily be construed as support for corruption. Likening the opposition to corruption to the opposition to terrorism, Kennedy maintains that to oppose any of these practices places one uneasily outside the common sense of the international community. He posits that although it is widely recognised that ‘one person’s terrorist is another’s freedom fighter’, one is not permitted to speak in favour of terrorism, and likewise, despite the difficulty in defining corruption, in polite society one must be opposed to it. Kennedy, in his analysis has rightly recast the question whether one should or should not have an anti-corruption campaign into the different question – whether a campaign against corruption could have procedural or definitional excesses.

 

In Kennedy’s view, the anti-corruption campaign may have gone too far, for instance by disrupting too much of the local economic fabric of developing countries too quickly. With respect to definitional limitations, the anti-corruption campaign may have over extended definitional boundaries by being extended to the point that it is no longer plausible to claim that the practices being opposed are corrupt.

 

Bringing it all together

Despite the poignancy of Kennedy’s observation, he does not make much of the underlying ideological struggle that characterises the current anti-corruption campaign. Such ideological concerns of necessity often mar many promising initiatives as well as provide creative tensions that underpin the pursuit of these anti-corruption campaigns. Kennedy does however observe that the current anti-corruption campaign clearly taps into a widespread sense of illegitimacy. However, when one begins to define the object of this quite general condemnation not just in moral terms, but also in terms of the rule of law, and to specify its link to retarded economic development, quite familiar difficulties emerge.

 

Kennedy rightly surmises that these familiar difficulties relate to the fact that the efforts to battle corruption suddenly become an effort to stigmatise some economic policies and some legal regimes at the expense of others precisely without analyzing their distributional or social consequences in any specific detail. It is in this sense, Kennedy maintains, that the anti-corruption campaign, even at its most reasonable core, remains an ideological project, an effort to leverage the rhetorical advantages of a shared moral opprobrium for a series of specific legal or institutional changes without having to specify who will win and who will lose as a consequence.

 

The deeper issue in the debate betrays the danger of stereotyping complex phenomena such as corruption through the emphasis on one particular aspect at the cost of a fuller understanding of the whole phenomenon. More importantly, the rhetoric of the anti-corruption campaign casts the problem of corruption as a domestic problem in which developing countries bear the cost of the corruption through stunted development. The rhetoric ignores the fact that corruption owes its current salience in the international arena to the concerns regarding the effects of corruption on foreign investors. Once the anti-corruption campaign is viewed in the context of its impact on foreign investors, the arguments against corruption lose their retardation of development rationale and become primarily a question of redistribution between foreign and local investors.

Tumultuous yet propitious capital markets

In these times of austere growth in world economies, the 1.5% growth forecasted for Sub-Saharan Africa and the 2.9% forecast in 2009 for Nigeria is hardly modest, exceeding global growth forecasts by 3-4%. With a conservative estimation of the population of over 150 million people and 72 million in the workforce, Nigeria as the 9th most populated country in the world offers one of the more attractive investment prospects in the current economic climate.

Given the austere growth in mature world economies, there is much scope for growth in the Nigerian capital markets. Yet, as the major world economies in 2008 tethered on the brink of a financial meltdown, the capital markets in Nigeria were also undergoing a tumultuous experience. The market capitalization fell from a high of N13.5 trillion ($USD 1 billion) in March 2008 to less than N4.6 trillion by January 2009. Although the causes of the decline in the Nigerian capital markets were unrelated to the financial crisis that originated in the United States and spread through the other economies of the developed world, the consequences nonetheless had far reaching effects on the Nigerian markets.

Given the loss of confidence occasioned by the precipitous correction in the Nigerian capital markets, I offer a framework for analysis that suggests that we utilize the correct historical precedent to view the market correction, that we ensure that we conduct a proper diagnosis of the problem, and that our analysis of the historical precedent and diagnosis of the problem, moving forward, informs our proposed policy responses to stabilize the capital markets.

 The right historical precedent

The events of in 2008 could be analyzed in the context of several market crashes including the 1673 Dutch tulip bulb crash (prices skyrocketed in frenzied futures trading with each tulip bulb reaching the equivalent of $25,000 today), the South Sea Bubble of 1720 (shares in the South Sea Company rose to over ten times their initial value before all the value was wiped out), the Florida Real Estate Craze (property values soared over ten times their value before crashing to pre boom levels), and the 1929 Stock Market crash in the United States (over 80 percent of the value of the market was wiped out). More recently, the 1987 Crash (22.6%, or $500 billion lost in one day), the Asian crash, and the DotCom crash (The Nasdaq Composite lost 78% of its value) and the global credit crunch in 2009 ($30,000bn wiped of the value of shares worldwide).

The relevant historical precedent for the Nigerian market correction is the 1929 crash in the United States. For anyone who has studied the crash of the US stock market in 1929, the events of the 2008 market correction in Nigerian markets paints eerie historical parallels. First, there was very limited competition in the US market with large single entities controlling large segments of the primary industries (utility, transportation and entertainment industries), a situation similar to the structure of the Nigerian capital markets today. Second, as in the Nigerian banking sector today, there were questionable credit allocation decisions because of an inadequate banking system and substantial information asymmetry between issuers and investors.

The causes of the market correction

There have been numerous explanations regarding the causes of the market correction. These include suggestions that stocks were overpriced and that the crash brought share prices back to a normal level. Some point to high levels of fraud and illegal activities, as well as over-exposure to margin loans.  Others point to the global financial crisis and the exit of foreign investors from the Nigerian capital markets, inadequate infrastructure causing constraints on the real economy, the commercial banks repeated fundraising from the markets, diversion of available capital to private placement offers, the failure of the government to put together a bail-out plan for the market, the absence of a market maker function, and statements of public officials that stocks were overvalued. Before some these conclusions about the causes of the market harden into conventional wisdom, it seems worth inquiring whether the right questions were asked, much less whether the right answers were reached.

One recurring explanation that does merit further analysis concerns the connection between margin lending and the correction in the Nigerian capital market. Similar to Nigeria, at the time of the 1929 crash, the exposure of the US banks to the stock market was not only high because of their investments, but their exposure was exacerbated by the high number of individual investors who had borrowed heavily on margin to buy stocks. Although much has been said about the impact of margin lending on the 1929 market crash, margin buying accounted for about 5% of the market value of the stock market and similar to the situation in Nigeria, cannot entirely explain the downturn in the market.

In my view, any one explanation and I have reviewed many, inevitably oversimplifies what was a complex and long-developing set of vulnerabilities. In this context, it is important to note that the market correction was not simply an aberration, a failure on the part of certain market operators, but deeper systemic flaws in our current regulatory framework.

In my view, explanations of the market correction that suggest that the design of our regulatory framework unduly emphasizes the micro-prudential (a focus on the individual) aspects of the regulatory framework often at the expense of macro-prudential and systemic ramifications (systemic risks) of our capital markets, which recent developments have indicated are key to financial stability go much further in explaining the market correction. This clearly calls for greater collaboration among various regulators and for strengthening our understanding of the interface between micro-prudential and macro-prudential issues.

Charting a regulatory framework to focus on systemic risks

Applying the apt historical precedent and focusing on the macros prudential issues suggests that we inject a normatively superior approach to our policy making. This point can, of course be rephrased as a set of binary policy choices. If the correction was a consequence of the actions of a few market operators, the proper policy response would be a more vigorous enforcement of our regulatory framework. On the other hand, if the correction stemmed from a more fundamental failure of the existing regulatory framework, then what is required is a thorough overall of the existing framework governing the operations of our capital markets.

Acknowledging that the market correction indicated a systemic failure within the regulatory framework for the Nigerian capital markets requires that in addition to the fault allocating exercise which is required, also more importantly needed is a prospective revamp of the current regulatory framework to guard against future corrections. Given that regulatory resources are finite, we need to make informed choices with respect to where we focus our regulatory resources. This requires that we develop methods that enable regulators to focus on critical threats to the efficient operation of the capital markets. It in this context that risk analysis will serve as a tool for informed decision making. Risk-based regulation is advantageous because it inherently requires regulators to incorporate cost-benefit judgments into the focus of finite regulatory resources on firms or activities that pose the greatest threat to the integrity of the marketplace.

In closing, the need to restore confidence in the integrity of our capital markets has never been greater. The damage to individual investors is a constant reminder of the urgent need to act to strengthen the regulatory framework of our capital markets and put our economy back on track to a sustainable recovery. We must build a new foundation for capital markets that is simpler and more effectively enforced, that protects the everyday investor, that rewards innovation and that is able to adapt and evolve with changes in our growing economy.

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