Corporate Law for Good People

46 Pages Posted: 17 Jan 2020 Last revised: 23 Feb 2020

See all articles by Yuval Feldman

Yuval Feldman

Bar-Ilan University - Faculty of Law

Adi Libson

Bar-Ilan University - Faculty of Law; Van-Leer Institute

Gideon Parchomovsky

University of Pennsylvania Law School

Date Written: January 1, 2020

Abstract

This article offers a novel analysis of the field of corporate governance by viewing it through the lens of behavioral ethics. It calls for both shifting the focus of corporate governance to a new set of loci of potential corporate wrongdoing and adding new tools to the corporate governance arsenal. The behavioral ethics scholarship emphasizes the large share of wrongdoing generated by "good people" whose intention is to act ethically. Their wrongdoing stems from "bounded ethicality" -- various cognitive and motivational processes that lead to biased decisions that seem legitimate. In the legal domain, corporate law provides the most fertile ground for the application of behavioral ethics since it encapsulates many of the features that the behavioral ethics literature found to confound the ethical judgment of good people, such as agency, group decisions, victim remoteness, vague directives and subtle conflict of interests.

Bounded ethicality suggests a view of corporate law that is dramatically different than that portrayed by traditional legal and economic theorists. Not only does it suggest that wrongdoing can be committed by well-intentioned people who wish to do right, but also that the biases they display call for a radically different set of legal interventions than those advocated by standard economic theory. If standard theorizing views corporate agents as self-interest maximizers, bounded rationality perceives them as actors with varied and nuanced motivations that could benefit from subtle legal reforms.

This Article's assessment of corporate governance through the behavioral ethical lens proceeds in three stages. First, it exposes potential wrongdoing by good people that conventional corporate governance does not address. Second, it suggests novel corporate governance interventions supported by behavioral ethics to address wrongdoing by good people. Third, it identifies existing interventions that according to behavioral ethics analysis may generate unintended adverse effects on the behavior of well-meaning corporate officers and exacerbate wrongdoing instead of mitigating it. As we will show bounded ethicality has important implications for a wide range of topics in corporate governance, such as board structure, independent directors, regulation of institutional investors and proxy advisory firms, the business judgment rule, and corporate and intra-board liability.

Keywords: corporate governance, behavioral ethics, behavioral economics, business judgment rule, self-concept maintenance, omission bias, independent directors, institutional investors

JEL Classification: D23, D90, D91, G30, G32, G34, G38, J33, K22, K42, L20, L22 M14

Suggested Citation

Feldman, Yuval and Libson, Adi and Parchomovsky, Gideon, Corporate Law for Good People (January 1, 2020). Northwestern University Law Review, Vol. 115, 2020, Bar Ilan University Faculty of Law Research Paper No. 20-03, Available at SSRN: https://ssrn.com/abstract=3512377 or http://dx.doi.org/10.2139/ssrn.3512377

Yuval Feldman

Bar-Ilan University - Faculty of Law ( email )

Faculty of Law
Ramat Gan, 52900
Israel

Adi Libson (Contact Author)

Bar-Ilan University - Faculty of Law ( email )

Faculty of Law
Ramat Gan, 52900
Israel
97225631156 (Phone)

Van-Leer Institute ( email )

43 Jabotinsky Street
POB 4070
Jerusalem, 91040
Israel
9725631156 (Phone)

Gideon Parchomovsky

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-1603 (Phone)

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