Rewarding Outside Directors

47 Pages Posted: 24 Jan 2007  

Assaf Hamdani

Hebrew University - Faculty of Law

Reinier Kraakman

Harvard Law School; European Corporate Governance Institute

Date Written: January 2007

Abstract

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.

Keywords: independent directors, liability, gatekeepers

JEL Classification: K22, K47

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

Assaf Hamdani

Hebrew University - Faculty of Law ( email )

Mount Scopus, 91905
Israel

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 )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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