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Rewarding Outside Directors
Assaf Hamdani Hebrew University - Faculty of Law Reinier Kraakman Harvard Law School; European Corporate Governance Institute January 2007 Harvard Law & Economics Discussion Paper No. 578 ECGI - Law Working Paper No. 85/2007 Abstract: 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.
Keywords: independent directors, liability, gatekeepers JEL Classifications: K22, K47 Working Paper SeriesDate posted: January 24, 2007 ; Last revised: June 25, 2007Suggested CitationContact Information
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