CHAPTER TWO PROVIDING A THEORETICAL BACKGROUND TO FINANCIAL SCANDALS
2.1 – Introduction This chapter provides a theoretical background to the legal issues that will be analysed in the book. Since the interrelation between corporate governance and structured finance is central to the way in which financial scandals are explained in this work, a separate discussion is conducted for these two main dimensions of the research. For this purpose a number of themes (or determinants) are identified in the context of corporate and financial law and a theoretical framework is provided for their subsequent legal analysis. The first part of the chapter identifies the two themes that form the corporate governance analysis. Firstly, a fundamental issue is to explain the relevance of corporate structure in the context of financial scandals and the extent to which difficulties in monitoring decision-making processes within certain governance structures have resulted in managerial abuses. Secondly, it is essential to establish in whose interest the company should be run. While this theoretical discussion – involving mainly the dichotomy between shareholder value and stakeholder theory – can shed light on principles underpinning corporate culture over the last three decades, it also triggers more practical questions as to which legal mechanisms are in place to monitor those in control of the firm. The second part of the chapter focuses on structured finance, and more generally of capital market finance, which is recognised as a fundamental factor behind the scandals. This enquiry is initiated by exploring different patterns of financial development, whereby the demarcation between bank-based finance and capital market-based finance is introduced. It is also pointed out that the prevailing trend over the last decade has been one characterised by disintermediation from banks, with corporations resorting to capital markets finance, often through the employment of structured finance transaction. The second theme identified here relates to the regulatory models available to discipline financial markets and the way in
