Corporate Governance for Crooks? The Case for Corporate Virtue

31 Pages Posted: 30 Sep 2003

See all articles by Margit Osterloh

Margit Osterloh

University of Basel; Professor (em.) University of Zurich

Bruno S. Frey

CREMA; University of Basel

Date Written: July 2003

Abstract

Corporate scandals are reflected in excessive top management compensation and fraudulent accounts. These scandals cause an enormous amount of damage, not only to the companies affected, but also to the market economy as a whole. As a solution, conventional wisdom suggests more monitoring and sanctioning of management. We argue that these efforts will create a governance structure for crooks. Instead of solving the problem, they make it worse. Selfish extrinsic motivation is reinforced. We suggest measures which clash with conventional wisdom: selecting employees with pro-social intrinsic preferences, de-emphasizing variable pay for performance and strengthening the participation and self-governance of employees. These measures help to increase intrinsically motivated corporate virtue and honesty.

Keywords: Corporate Virtue, fraud, intrinsic motivation, crowding theory, pay for performance, employee participation

JEL Classification: G3, M2

Suggested Citation

Osterloh, Margit and Frey, Bruno S., Corporate Governance for Crooks? The Case for Corporate Virtue (July 2003). ZEW Working Paper No. 164. Available at SSRN: https://ssrn.com/abstract=430062 or http://dx.doi.org/10.2139/ssrn.430062

Margit Osterloh (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Professor (em.) University of Zurich ( email )

Südstrasse 11
Zürich, CH-8008
Switzerland

Bruno S. Frey

CREMA ( email )

Südstrasse 11
Zurich, CH 8008
Switzerland
+41 44 380 00 78 (Phone)

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

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