Ties that Bind: Codes of Conduct that Require Automatic Reductions to the Pay of Directors, Officers, and Their Advisors for Failures of Corporate Governance

Abstract

Executives and directors at large corporations rarely face personal liability for failing to impose effective controls on subordinates or outside suppliers, even when this failure results in significant financial or reputational damage to the corporation. My proposal for binding codes of conduct seeks to change the dynamics of corporate governance. These executives and directors would agree to meet certain standards and further agree to automatic reductions in compensation if these standards are not met, regardless of whether there is an actual violation of the law.

Certain consumers and investors already send business to perceived “ethical” companies or companies that are known for having strong and effective management. Some executives and directors will therefore seek further business by agreeing to my proposed binding codes of conduct. Others will not adopt the codes. Consumers and investors will decide whether they care. My proposal is completely market-based, and requires no government intervention or changes to the law.