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Wednesday, April 04, 2007


No legal obligation to shareholders, or protection from over regulation?

The supreme court is set to hear debates between the bush administration and shareholders of fiber-optic company Tellabs. The Bush administration is claiming that there should be a limit in lawsuits for corporate scandals, like the ones in 2002 involving companies like Enron. Their reasoning behind this is that too many lawsuits will “bog down” business and make Financial firms less competitive and less productive.The argument presented by the shareholders is that The “lost millions” when then CEO made false statements.Essentially, since 2002 regulatory laws on financial firms since 2002 have allowed shareholders to sue extensive class action lawsuits.This seems like a case of Rent-Seeking big corporations are looking to “ease” there business practices by making them unaccountable for their own actions. Sure competition should be encouraged in business, because it HELPS the economy. If, however, it is a kind of competition that comes from hurting shareholders, than it seems to be HURTING the economy.I see no justification for violating the personal liberty of share holders, making themselves unable to legally defend themselves, just to increase production.It seems like rent-seeking o the part of the financial businesses, to lower costs by taking away legal barrier

I think there is a much larger framework for understanding this issue. I haven't paid specific attention to this issue, but I think I can suggest the larger perspective.

Corporations have limited liability, and it is this limited liability that provides an incentive for many people in business to choose this form of business organization.

The owners of such corporations are of course the shareholders. But, there is a principal-agent problem that is involved. The people making choices for the corporation are not the owners. The people making choices may make choices the owners don't really want.

So, when corporations were allowed by government, government also saw the need to regulate the actions and many practices of corporations in ways that might remedy or reduce the principal-agent problem.

In at least some cases, I find corporate scandals result from failure of government to be the watchdog it presents itself to be according to laws and regulations. In other words, government may fail to police its regulations, and in other cases it seems to fail to regulate areas subject to the principal-agent concerns.

But, having government regulate then makes it less sensible for share holders to be able to sue. After all, if government regulates but allows corporations get away with bad choices vis a vis the shareholders, then perhaps any resulting scandal should mean the shareholders sue government for failing its responsibilities. The shareholders do now rely on government regulations.

It seems that perhaps the whole framework should be one or the other. Either no government regulation and easy share holder suits against corporations, or not much reliance on share holder suits and government enforces regulations to reduce the principal-agent problems.

By the way, in the middle of all this discussion, I think it is also important to notice the nature of the scandal. If an executive actually lies, then we already have laws against fraud. In these sorts of cases, why are other types of laws needed?
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