Corporate Law for Good People

Yuval Feldman, Adi Libson & Gideon Parchomovsky | January 17, 2021

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. Behavioral ethics scholarship emphasizes that the large share of wrongdoing is generated by “good people” whose intention is to act ethically. Their wrongdoing stems from “bounded ethicality”—various cognitive and motivational limitations in their ethical decision-making processes—that leads to biased decisions that seem legitimate. Bounded ethicality has important implications for a wide range of topics in corporate governance, like board structure, independent directors, regulation of institutional investors and proxy advisory firms, the business judgment rule, corporate liability, and intraboard fiduciary duties. In the legal domain, corporate law provides the most fertile ground for the application of behavioral ethics. It encapsulates many of the features that the behavioral ethics literature finds to confound the ethical judgment of good people, like principal–agent relations, group decisions, victim remoteness, vague directives, and subtle conflicts of interest.

Behavioral ethics 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 theory views corporate agents as self-interest- maximizers, bounded ethicality perceives them as actors with varied and nuanced ethical 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. Finally, it identifies existing interventions that, according to behavioral ethics analysis, may have unintended adverse effects on the behavior of well- meaning corporate officers and exacerbate wrongdoing instead of mitigating it.