Corporate Law for Good People

A new paper by Yuval Feldman, Adi Libson, and Gideon Parchomovsky concludes that “good” behavior

First, it exposes potential ethical blind-spots in which wrongdoing by ‘good people’ might be far more prevalent than previously assumed and conventional corporate governance does not address. Second, it suggests novel corporate governance interventions supported by behavioral ethics to address wrongdoing by good people. Third, it identifies existing intervention that according to behavioral ethics analysis may generate unintended adverse effects on the behavior of well-meaning corporate officers and exacerbate wrongdoing instead of mitigating it.

Bounded ethicality suggests a view of corporate law that is dramatically different than that portrayed by traditional legal and economic theorists. Not only does it suggest that wrongdoing can be committed by well-intentioned people who wish to do right, but also that the biases they display call for a radically different set of legal interventions than those advocated by standard economic theory. If standard theorizing views corporate agents as self-interest maximizers, bounded rationality perceives them as actors with varied and nuanced motivations that could benefit from subtle legal reforms.

This Article’s assessment of corporate governance through the behavioral ethical lens proceeds in three stages. First, it exposes potential wrongdoing by good people that conventional corporate governance does not address. Second, it suggests novel corporate governance interventions supported by behavioral ethics to address wrongdoing by good people. Third, it identifies existing interventions that according to behavioral ethics analysis may generate unintended adverse effects on the behavior of well-meaning corporate officers and exacerbate wrongdoing instead of mitigating it. As we will show bounded ethicality has important implications for a wide range of topics in corporate governance, such as board structure, independent directors, regulation of institutional investors and proxy advisory firms, the business judgment rule, and corporate and intra-board liability.

via Corporate Law for Good People

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