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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

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.

Number of Pages in PDF File: 47

Keywords: independent directors, liability, gatekeepers

JEL Classification: K22, K47

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Date posted: January 24, 2007  

Suggested Citation

Hamdani, Assaf and Kraakman, Reinier, Rewarding Outside Directors (January 2007). Harvard Law & Economics Discussion Paper No. 578; ECGI - Law Working Paper No. 85/2007. Available at SSRN: https://ssrn.com/abstract=959210 or http://dx.doi.org/10.2139/ssrn.959210

Contact Information

Assaf Hamdani
Hebrew University - Faculty of Law ( email )
Mount Scopus, 91905

Reinier H. Kraakman (Contact Author)
Harvard Law School ( email )
1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-496-3586 (Phone)
617-496-6118 (Fax)

European Corporate Governance Institute ( email )
B-1050 Brussels
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