On the Proper Motives of Corporate Directors (Or, Why You Don't Want to Invite Homo Economicus to Join Your Board)

Abstract:     
One of the most important questions in corporate governance is how directors of public corporations can be motivated to serve the interests of the firm. Directors frequently hold only small stakes in the companies they manage. Moreover, a variety of legal rules and contractual arrangements insulate them from liability for business failures. Why then should we expect them to do a good job?

Conventional corporate scholarship has great difficulty wrestling with this question, in large part because conventional scholarship usually adopts the economist's assumption that directors are rational actors motivated purely by self-interest. This homo economicus model of behavior may be fundamentally misleading when applied to corporate directors. The institution of the corporate board is premised on the expectation, and the experience, of director altruism, in the form of a sense of obligation to the firm and its shareholders. As a result, to properly understand the role and conduct of corporate directors, we must take account of the empirical phenomenon of other-regarding behavior.

One potential starting point for such a project can be found in the extensive evidence that has been developed over the past four decades on other-regarding behavior among strangers in experimental games. This evidence demonstrates that cooperative, altruistic behavior is in fact quite common. More important, it is predictable. A variety of factors can reliably increase, or decrease, the incidence of cooperation observed in experimental games. These results may offer a foundation for building a model of human behavior that is both more accurate and more useful than the homo economicus model. They also carry important implications for how we select, educate, regulate, and compensate corporate directors.

Number of Pages in PDF File: 27

Keywords: corporate governance, corporate directors, public firms

JEL Classification: K22

working papers series