Markets vs. Regulation: Investor Protection in the U.S. Compared to Israel

Abstract

In this book chapter, I show that, while the U.S. systems relies on factors that are not determined by regulation, which I call market forces, to shape sophisticated investor protection standards, Israel prescribes such arrangements by the heavy hand of the regulator. I substantiate my argument by comparing these two jurisdictions’ approach to major mechanisms that aim to protect public investors through monitoring and bonding. Section II describes their different approach to the duty of care and to regulating related party transactions and Section III turns to apply such differences to executive and director compensation arrangements. Section IV describes their significant discrepancies related to public shareholder power to propose, appoint and remove directors and Section V describes how their similar objectives toward director independence standards have evolved quite differently and affected the success of initiatives to enhance board independence through changes to board composition. Section VI discusses striking disparities in how these two systems aim to protect investors against controlling minority shareholders, and Section VII concludes.

Keywords: corporate governance, investor protection, regulatory approach, market forces