CONTRACTUAL GOVERNANCE – AN OUTCOME OF THE RECENT FINANCIAL CRISIS

Due to the information technology development, outsourcing has gained much importance, especially in the banking business where the creation of the shadow banking system through the outsourcing of risks on special-purpose entities has extended the corporate boundaries, increasing corporate risks. The global crisis revealed the fact that systemic risk has been underestimated and that market-correlation has been misunderstood. Under these circumstances, an appropriate contract design will reduce managers’ misbehavior and align the manager and investor interests. Contractual governance is a necessary tool for reforming private arrangements not individually, but as parts of a network where over-regulation is counterproductive.