Corporate Governance in the Former Soviet Union: The Failure of the Self Enforcing Model

Abstract

With the fall of the Soviet Union, a number of newly independent countries emerged, many of them attempting to put in place market based institutions and legal regimes. A number of corporate scholars from the United States participated in the development of these legal regimes.

In the area of corporate law, problems arose from poor draftsmanship, lack of adequate expertise and institutions, poorly functioning courts, the problem of hold over directors from the Soviet period, and corruption. As a result of these and other factors, traditional corporate statutes of the type used in most developed countries did not work effectively. To address this problem, two professors, Bernard Black and Reinier Kraakman, suggested that corporate laws be "self enforcing". The model entailed less reliance on judicial enforcement and more on increasing the authority of outside investors, including increased procedural safeguards and greater limitations on director behavior.

This article takes a different approach. It identifies the system of governance used during the Soviet period when limits existed on management's self serving behavior. The article posits that some aspects of the Soviet approach, albeit shaped by the contours of a market economy, would be a better way to protect shareholders and encourage investment than the "self enforcing" model.

This article is reprinted from [or was adapted from an article published in] the Journal of East European Law, Volume No.7 Issue Nos. 3 -4.