Financial Tunnelling and the Revenge of the Insider System

In this paper, we document how European companies can use financial tunnelling to the disadvantageof minority shareholders, despite improved legislation directed at eliminating such activities. In fourcase studies, two German and two Italian, we document how newly established corporate governancestandards were successfully circumvented by dominant shareholders, major financial institutions,politicians, and in the worst case the regulator. These cases demonstrate that for effective CorporateGovernance to work, one not only has to change the law, but even more importantly, one has to ensurethe widespread acceptance of new rules. The litmus test of corporate governance reforms in anycountry is whether the rules are applied objectively in situations where powerful elites perceive theyare disadvantaged under the new regulations....