Sunday, November 12, 2006
Helping the State: The Role of the Press and Whistleblowers in Fighting White-Collar Crime
Even though this particular case is, at most, a case of reprehensible moral behaviour (realising a benefit of 5000% on one’s investment and at the same time laying-off 260 staff in order to reduce costs), the mechanism that was at work is very important. Several academics in the field of finance have expressed the view that a functioning (financial) press – i.e. one that is precisely capable of revealing this kind of incidents – can serve as a functional equivalent for legal protection of investors and other stakeholders that do not control the companies decision-making process. In other words, in countries where minority shareholders and other minorities in the firm are not well protected in company law, the public denunciation of “crooks” in newspapers can have a deterring effect on other potential crooks and can permit to punish crimes that otherwise would go unpunished. This at least is the thesis defended by Alexander Dyck and Luigi Zingales in their study on private benefits of control.
This brings us back to a point, which I’ve made in several previous posts. In fact, I have pointed out the limits of public regulation for preventing “misbehaviour” by corporate insiders. The financial press is in fact a mechanism that can denounce criminal or unethical behaviour, push the corporate elite to justify their actions, and put certain issues on the political agenda by creating a public pressure. Even though such mechanisms can of course be (ab)used for populist goals, the financial press can exercise a certain control over corporations in ways that the state cannot.
I guess the advocates of this view just scored a point when we look at the “Hartz-Prozess” in Germany (cf. http://www.faz.net/s/RubFC06D389EE76479E9E76425072B196C3/Doc~EDC7C2DC2FC9340B7A711CE43B363DA4C~ATpl~Ecommon~Scontent.html. )In fact, the German corporate governance system is characterised by its far-reaching codetermination rights for employees; meaning that half of the seats on the supervisory board of large stock corporations are held by employees and/or union representatives. This is of course a potentially powerful means of internal control. However, what happened at Volkswagen during the era of Peter Hartz, is that large sums were spend in “gifts” to supervisory board members, and notably to the employees representatives, in order to buy their votes for difficult decisions. This extreme case does of course not put into question the codetermination system as such, it shows however poignantly the limits of the reliability of internal control mechanisms. The problem is – in my view – that when a very limited number of people interact over a long period of time and have collectively far-reaching control over resources, sooner or later someone will be tempted to abuse this power…
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