arose government fiat rather than private contract. The ownership structure and initial charters of privatized Russian companies were imposed by the privatization program, and the companys 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 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. The recipients of shares of privatized enterprises expect these shares to have real value. But in Russia, many citizens have beer 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 nomina price to an affili te controlled by Primorsk nd also that Far Eastern Shipping plans ee, e.g., Boycko, Shleifer Vishny, Voucher Privatization, supra note 16, at 250-53
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. 12 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
This can-and in Russia, already has--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 administrablerules The most significant enforcement limitation is weak judicial enforcement. 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. 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, may be corrupt, or may be so ill-paid that skilled lawyers will not take judicial jobs 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 An 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 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 dont 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
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). 27 Our 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. 28 An 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 13 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
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. 3 Enforcement will be easier if courts can often resolve disputes by applying bright-line rules rather than broad standards 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. Moreover, these markets lack the nonleg 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 In developed economies, disclosure is an important constraint on management behavior Disclosure of management self-dealing can lead to formal enforcement. Disclosure of self- alary by ten times or more by returning to the private sector as a lawyer-- leaving the incompetent and the corrupt to staff the judiciary 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 companys 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 I [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 nomina par )value of the shares
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. 14 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-
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. 4 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. 5 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 leg 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 hey are making away. " (quoting Moscow investment banker Boris Jordan)(internal quotation marks omitted))
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)). 15 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
stock ownership of top management, to be"commercial secrets. Some lock unwanted shareholders out of shareholder meetings, conduct shareholder votes by show of hands dominated by employees), or refuse to transfer shares if they don,'t approve of the new owner. 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 forn 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 Il. 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 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) 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
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.). 16 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