Self-Handicapping and Managers' Duty of Care
Wake Forest Law Review, Vol. 42, p. 803, 2007
27 Pages Posted: 24 Apr 2007 Last revised: 6 Apr 2008
This symposium essay focuses on the relationship between managers' duty of care and self-handicapping, or constructing obstacles to performance with the goal of influencing subsequent explanations about outcomes. Conventional explanations for failures of caretaking by managers have focused on motives (greed) and incentives (agency costs). This account of manager behavior has led some modern jurists, concerned about recent corporate scandals, to advocate for stronger deterrent measures to realign manager and shareholder incentives.
Self-handicapping theory, by contrast, teaches that bad manager behavior may occur even when incentives are well-aligned. Highly successful individuals in particular come to fear the pressure of replicating past success. To avoid the regret associated with the future failure that they anticipate, such individuals then create hurdles (through active or passive self-sabotage) or excuses. When failure comes, individuals hope to shift attention from their merits to the handicap. Research shows that self-handicapping works. Indeed, managers in failing firms who self-handicap may escape with their reputations and compensation burnished.
In this essay, I summarize an extensive body of research on self-handicapping that surprisingly has not been well explored by corporate law theorists. I then suggest that modern corporate scandals traditionally understood as products of failures of monitoring - like Enron - might be better explained in part as a function of self-handicapping by managers. This explanation supports recent efforts to move beyond a purely carrot-and-stick model of corporate governance. Finally, I briefly discuss mechanisms to reduce self-handicapping by corporate officers, in particular, making them self-aware and selecting executives less prone to engage in this type of wasteful activity. The law has a potential role to play in this process, but its proper focus is directors' negligence in hiring, not managers' failures in taking business risks.
Keywords: fiduciary duty, self-handicapping, duty of care, corporate governance, behavioral law and economics, negligence, duty of loyalty, managers, officers
JEL Classification: K2, K00, M5, M2, K1, K22
Suggested Citation: Suggested Citation