Behavioral Finance in Corporate Governance - Independent Directors, Non-Executive Chairs, and the Importance of the Devil's Advocate

Randall Morck

No 10644, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Common Law, parliamentary democracy, and academia all institutionalize dissent to check undue obedience to authority; and corporate governance reformers advocate the same in boardrooms. Many corporate governance disasters could often be averted if directors asked hard questions, demanded clear answers, and blew whistles. Work by Milgram suggests humans have an innate predisposition to obey authority. This excessive subservience of agent to principal, here dubbed a "type II agency problem", explains directors' eerie submission. Rational explanations are reviewed, but behavioral explanations appear more complete. Experimental work shows this predisposition disrupted by dissenting peers, conflicting authorities, and distant authorities. Thus, independent directors, chairs, and committees excluding CEOs might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant - perhaps reflecting problems identifying genuinely independent directors.

JEL-codes: G3 (search for similar items in EconPapers)
Date: 2004-07
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-evo and nep-fin
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published as Randall Morck, 2008. "Behavioral finance in corporate governance: economics and ethics of the devil’s advocate," Journal of Management and Governance, Springer, vol. 12(2), pages 179-200, May.

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