So I'm going to talk about five levels of financial regulation. I'll call it regulation within a firm, that's one. Number two is trade groups. These are organizations, volunteer organizations of firms. Then there's local government regulation, national government regulation, and finally international regulation. We've got all of these. So let's me start with within-firm regulation. The board of directors is a uniform policy I think practically everywhere in the world. So they typically have outside directors, people from other walks of life who come in to represent the community, or to just give them a sense of perspective. The board of directors hires the president and fires the president if he or she is not acting properly. The board of directors, you can't make their burdens too heavy because you want people who are connected to the world, and you value that. So you can't ask them to make it a full-time job. So a board of directors is usually a part-time job, and they're out there involved in different things. So you put people in with reputations. I talked earlier about personality disorders, like the anti-social personality disorder. People who are like that are hard to diagnose, but you can diagnose them, you could get an impression. We're all forming impressions of people's personalities. When you're appointing directors, you don't appoint people who have any shade of suspicion of having a personality disorder. So that's part of what makes directors work. It may not look fair who gets put on the directors, but it's somebody that there's a relative agreement, is not a criminal, is not a liar, and has some sense of community spirit. So that's how it really does work in most cases. Now, a problem with companies is part of the thing we do, we put people on the corporation or the board of directors who have such good reputations that they're not going to compromise it, right? If someone says, let's do some devious trick, this guy would say, not on my watch, and resign. Because if you have a reputation, it's precious. So that's partly what prevents devious tricks from being played. Now, I want to talk about devious tricks. The word tunneling is often used to describe tricks that people in companies use to steal money from the company. I'm referring particularly to a nice article by Johnson, La Porta, Lopez-de-Silanes, Shleifer in 2000. It's expropriation by minority shareholders, or by board members, or by officers, as if by an underground tunnel. Now they conclude in this paper that tunneling is a real and big problem, and it's bigger in civil law countries than in common law countries. Now what's the difference? Common law is what we have in the United States, which means that we have legislators making laws, but we also have courts making laws in a different environment. Their laws are not public laws officially, but they're legal precedent. So the courts, when the Supreme Court declares something, it's like making a law. And civil law, as exemplified on much of continental Europe, is entirely legislative. You have a Parliament or a Congress that makes laws, and there's no consideration of precedent by the courts. Common law has an advantage in that the courts are making judgments in a specific case where there's a dispute. So that makes them really close to the problem and really close to human issues. When there's a dispute between two sides in a legal case, you hear them on their two sides and you sense, there's some emotion here, I can see the conflict. I'm going to try to find a nice way to resolve it, and that becomes law. So I think that common law, I'll just say that common law is better than civil law, because it has this aspect to it. And it's better able to deal with tunneling, because tunneling comes up in specific cases where somebody has stolen money from a company, and the shareholders are furious, and they come to you and say, this was thievery. But usually it's subtle thievery. It's trickery, and it becomes hard to disentangle. I think that the courts do better at disentangling this kind of thing. So Johnson et al argue that tunneling is more frequent in civil law countries. Common law is very useful in preventing tunneling and other kinds of abuse. It's something that we don't often see. When you ask why is the UK so successful, it's common law in business, or the US. It has something to do with this.
