dealing or business problems can also lead to market sanctions, such as a drop in stock price reduced availability of credit, and difficulty in hiring employees. Embarrassment from public disclosure also exerts important discipline. For example. American boards of directors have many times replaced a poor CEO after- but only after -sharply critical stories appeared in the business press In an emerging market, disclosure, and thus its attendant benefits, is likely to be diminished or absent. Russia is an extreme case where market pressures work against good disclosure. A company that discloses its accounts honestly can find itself paying taxes that exceed 100% of pretax income. 4 Small firms also face a severe risk of mafia extortion and know that the local mafia are avid readers of financial disclosures, the better to judge how much payment to demand. The supposedly confidential financial statements required by the tax laws, once given to the government, are often delivered to the mafia by corrupt officials In this environment, investors do not even want the companies in which they invest to report profits honestly. The risk that managers will steal hidden profits is preferable to the certainty that the government or the mafia will take even more after honest disclosure. 5 D. Cultural Norms for Manager and large shareholder behavior A further reason why developed countries can make do with weak formal corporate law rules is that managers and shareholders are embedded in a culture that discourages opportunism. In part, the culture reflects the underlying legal norms and the penalties for violating those norms. But cultural attitudes also exist independently of and reinforce the leg norms, so that formal enforcement is infrequently needed. Few American corporate managers doubt that they work for the shareholders, even if they and their shareholders sometimes disagree about what this concept means. More generally, most managers in developed countries routinely follow laws of all kinds and think of themselves as law-abiding Russia offers a marked contrast. Managers of Russian enterprises cannot follow the law and stay in business. They must lie about their income to the tax authorities bribe the tax inspector, the customs inspector, the local police, and many other government officials, pay off the local mafia; and conduct business despite an intricate and often senseless web of rules. Not surprisingly, these managers often see corporate law as merely another obstacle, to be overcome in any way possible. Some managers have declared their corporate charter, or the 34 The principal cause of effective tax rates that can exceed 100% of pretax income is rules that limit which expenses can be deducted from revenue in computing pretax income. See, e.g., George Melloan, Russia Tailspins into a Laffer Curve Crisis, Wall St. J, Mar. 4, 1996, at A15 (reporting that, in Russia, wages above a specified(low) level are not deductible in computing pretax income). Developed countries also have rules limiting which expenses are deductible, but in much less extreme form 35 See id("[E]ven those companies that are well run and are making a lot of money don' t wish to audit themselves in keeping with international accounting principles because if they do the government will take what hey are making away. " (quoting Moscow investment banker Boris Jordan)(internal quotation marks omitted))34 The principal cause of effective tax rates that can exceed 100% of pretax income is rules that limit which expenses can be deducted from revenue in computing pretax income. See, e.g., George Melloan, Russia Tailspins into a Laffer Curve Crisis, Wall St. J., Mar. 4, 1996, at A15 (reporting that, in Russia, wages above a specified (low) level are not deductible in computing pretax income). Developed countries also have rules limiting which expenses are deductible, but in much less extreme form. 35 See id. ("[E]ven those companies that are well run and are making a lot of money don't wish to audit themselves in keeping with international accounting principles because if they do the government will take what they are making away." (quoting Moscow investment banker Boris Jordan) (internal quotation marks omitted)). 15 dealing or business problems can also lead to market sanctions, such as a drop in stock price, reduced availability of credit, and difficulty in hiring employees. Embarrassment from public disclosure also exerts important discipline. For example, American boards of directors have many times replaced a poor CEO after -- but only after -- sharply critical stories appeared in the business press. In an emerging market, disclosure, and thus its attendant benefits, is likely to be diminished or absent. Russia is an extreme case where market pressures work against good disclosure. A company that discloses its accounts honestly can find itself paying taxes that exceed 100% of pretax income.34 Small firms also face a severe risk of mafia extortion and know that the local mafia are avid readers of financial disclosures, the better to judge how much payment to demand. The supposedly confidential financial statements required by the tax laws, once given to the government, are often delivered to the mafia by corrupt officials. In this environment, investors do not even want the companies in which they invest to report profits honestly. The risk that managers will steal hidden profits is preferable to the certainty that the government or the mafia will take even more after honest disclosure.35 D. Cultural Norms for Manager and Large Shareholder Behavior A further reason why developed countries can make do with weak formal corporate law rules is that managers and shareholders are embedded in a culture that discourages opportunism. In part, the culture reflects the underlying legal norms and the penalties for violating those norms. But cultural attitudes also exist independently of and reinforce the legal norms, so that formal enforcement is infrequently needed. Few American corporate managers doubt that they work for the shareholders, even if they and their shareholders sometimes disagree about what this concept means. More generally, most managers in developed countries routinely follow laws of all kinds and think of themselves as law-abiding. Russia offers a marked contrast. Managers of Russian enterprises cannot follow the law and stay in business. They must lie about their income to the tax authorities; bribe the tax inspector, the customs inspector, the local police, and many other government officials; pay off the local mafia; and conduct business despite an intricate and often senseless web of rules. Not surprisingly, these managers often see corporate law as merely another obstacle, to be overcome in any way possible. Some managers have declared their corporate charter, or the