Cracking the code on tunneling: How self-dealing undermines trust—and markets

Tunneling—sometimes called self-dealing—occurs when those running a company funnel resources to themselves (or to entities they control), leaving minority shareholders in the lurch. It sounds blatantly unfair, but it’s a widespread concern in corporate governance worldwide.

In a seminal paper, “The Law and Economics of Self-Dealing,” Djankov, La Porta, Lopez-de-Silanes, and Shleifer show how different legal systems combat tunneling. Common law countries (like the U.K.) generally demand rigorous oversight of conflicted transactions, such as approval by independent shareholders and stricter disclosure rules. In contrast, many civil law nations lean on broad standards or board approvals, giving minority shareholders fewer ways to resist corporate insiders’ maneuvers. The researchers’ anti-self-dealing index highlights a clear trend: tighter protections against tunneling correlate with healthier, more dynamic stock markets—where outside investors feel confident that their money won’t vanish into insiders’ pockets.

Why does it matter to you? Whether you’re launching a startup, investing in the market, or simply keeping tabs on the business world, the fight against tunneling is all about building trust. When minority shareholders know the rules have their backs, capital flows more freely, innovation flourishes, and markets stay vibrant. When those protections are weak, insiders can skim assets at will, undermining confidence and long-term growth.

In short, tackling tunneling isn’t just about fending off shady behavior; it’s about crafting a fair playing field that attracts broader funding, spurs innovation, and enhances trust in the entire corporate system.

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Reference: Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2008). The law and economics of self-dealing. Journal of Financial Economics, 88(3), 430–465.