The Neglected Role of Justification Under Uncertainty in Corporate Governance and Finance

110 Pages Posted: 9 Jan 2019

See all articles by Claire A. Hill

Claire A. Hill

University of Minnesota Law School

Alessio M. Pacces

Amsterdam Law School / Amsterdam Business School (ACLE); European Corporate Governance Institute (ECGI); European Banking Institute

Date Written: January 9, 2019


The big corporate governance debates nowadays concern the corporation’s time horizons, and the balance of power between shareholders and managers. In response to actual and anticipated pressure from shareholder activists – typically, activist hedge funds – companies are, some say, becoming too short-term. If this story is credited, shareholders, as well as the greater society are being harmed. We argue here that this story may reflect, at least in part, a heretofore neglected facet of decision-making: an actor’s accountability, and consequently, her anticipated need to justify her decision in the case of a bad outcome. Our account does three novel things. First, we demonstrate that the need to justify is pervasive. Our account identifies a type of agency cost, “justification costs,” resulting from decisions motivated by justification. Under conditions of uncertainty, justification costs are higher. By contrast, in conditions of less uncertainty, the most justifiable decision is apt to be the decision made without regard to justification. Second, to our knowledge, the relationship between these sorts of agency costs and more traditional agency costs, such as those involving self-dealing or empire building, has not been considered. Reducing traditional agency costs typically means increasing accountability and the consequent anticipated need for justification; by contrast, reducing costs of justification generally means increasing managerial leeway, which might increase traditional agency costs. Third, and most importantly, we introduce a role for uncertainty. Under conditions of low(er) uncertainty, more accountability does not necessarily increase justification costs, which are apt to be low in any event, and does reduce traditional agency costs. But under conditions of uncertainty, accountability increases justification costs, potentially in an amount greater than any reduction in traditional agency costs; under some circumstances, reducing accountability, thereby granting managers more leeway, may be preferable. We propose a mechanism by which managers and stockholders can agree on granting managers some leeway for a specified period of time, in the form of “Control-Enhancing-Mechanisms” (CEMs). A CEM might, or might not, condition continuing leeway during the period on management’s meeting certain agreed-upon conditions. We consider how our argument as to the existence of justification costs might apply in some private and public financial contexts, and suggest some solutions in those contexts as well.

Keywords: Accountability, Justification, Agency cost, Hostile takeover, Hedge fund activism, Dual-class shares, Tenure voting, Systemic risk, Corporate governance, Uncertainty, Entrepreneurship, Psychology

JEL Classification: G23, G32, G34, G41, L26, K22

Suggested Citation

Hill, Claire Ariane and Pacces, Alessio Maria, The Neglected Role of Justification Under Uncertainty in Corporate Governance and Finance (January 9, 2019). European Corporate Governance Institute (ECGI) - Law Working Paper No. 429/2018, Available at SSRN: or

Claire Ariane Hill

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-624-6521 (Phone)

Alessio Maria Pacces (Contact Author)

Amsterdam Law School / Amsterdam Business School (ACLE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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European Banking Institute ( email )


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