International Handbook on the Economics of Corruption, Volume Two
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International Handbook on the Economics of Corruption, Volume Two

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Edited by Susan Rose-Ackerman and Tina Søreide

A companion volume to the International Handbook on the Economics of Corruption published in 2006, the specially commissioned papers in Volume Two present some of the best policy-oriented research in the field. They stress the institutional roots of corruption and include new research on topics ranging from corruption in regulation and procurement to vote buying and private firm payoffs.
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Chapter 8: Risks of Wrongdoing in Public Companies and Ways to Cope with Them: The Case of Brazil

Dante Mendes Aldrighi

Extract

8 Risks of wrongdoing in public companies and ways to cope with them: the case of Brazil1 Dante Mendes Aldrighi 1. Introduction This chapter examines corporate malfeasance in Brazil, focusing on the potential for management, directors and controlling shareholders to benefit from illicit actions that harm outside investors. Such actions, which some economists have dubbed ‘opportunism’, ‘moral hazard’, or ‘selfdealing’,2 encompass a wide range of activities: abuse of entrusted authority; violation of fiduciary duties; breach of formal contracts, regulations or laws; outright fraud; or practices and behavior that, though lawful, social conventions regard as reprehensible. Corporate wrongdoing damaging outside shareholders bears a number of striking similarities to corruption that benefits public officials. In the same way that politicians and government officials may misuse power and authority, delegated by voters and taxpayers, to achieve private benefits at the expense of the public interest, those running public companies can abuse their position to expropriate shareholders whose interests they should represent. In both cases, the agency problem is difficult to cope with because dispersed principals (the voting public or outside shareholders) lack the incentive to monitor the agents (public officials or corporate insiders3) and face coordination problems. This entails an undersupply of monitoring, which leaves considerable latitude for the agents to exploit the entrusted discretionary power to pursue objectives that conflict with those of the principals. Furthermore, battling corporate frauds that hurt outside investors requires the very same mechanisms needed to tackle corruption at the government level: transparency and disclosure, monitoring, appropriate...

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