Rewarding Outside Directors
Hebrew University - Faculty of Law
Harvard Law School; European Corporate Governance Institute
Harvard Law & Economics Discussion Paper No. 578
ECGI - Law Working Paper No. 85/2007
While they often rely on the threat of penalties to produce deterrence, legal systems rarely use the promise of rewards. In this Paper, we consider the use of rewards to motivate director vigilance. Measures to enhance director liability are commonly perceived to be too costly. We, however, demonstrate that properly designed reward regimes could match the behavioral incentives offered by negligence-based liability regimes but with significantly lower costs. We further argue that the market itself cannot implement such a regime in the form of equity compensation for directors. We conclude by providing preliminary sketches of two alternative reward regimes. While this paper focuses on outside directors, the implications of our analysis extend to other gatekeepers as well.
Number of Pages in PDF File: 47
Keywords: independent directors, liability, gatekeepers
JEL Classification: K22, K47
Date posted: January 24, 2007
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