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Behavioral Finance in Corporate Governance-Independent Directors and Non-Executive Chairs

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  • Randall Morck

Abstract

Corporate governance disasters could often be averted had directors asked their CEOs questions, demanded answers, and blown whistles. Work in social psychology by Milgram (1974) and others shows human subjects to have an innate predisposition to obey legitimate authority. This may explain directors’ eerily compliant behavior towards unrestrained CEOs. Other work reveals factors that weaken this disposition to include dissenting peers, conflicting authorities, and distant authorities. This suggests that independent directors, non-executive chairs, and committees composed of independent directors that meets without the CEO might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant. This may reflect measurement problems, in that many apparently independent directors actually have financial or personal ties to their CEOs. It might also reflect other behavioral considerations that reinforce director subservience to CEOs.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 2037.

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Date of creation: 2004
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Handle: RePEc:fth:harver:2037

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Cited by:
  1. Udi Hoitash, 2011. "Should Independent Board Members with Social Ties to Management Disqualify Themselves from Serving on the Board?," Journal of Business Ethics, Springer, vol. 99(3), pages 399-423, March.
  2. Enrichetta Ravina & Paola Sapienza, 2010. "What Do Independent Directors Know? Evidence from Their Trading," NBER Chapters, in: Corporate Governance National Bureau of Economic Research, Inc.
  3. Randall Morck & Lloyd Steier, 2005. "The Global History of Corporate Governance: An Introduction," NBER Chapters, in: A History of Corporate Governance around the World: Family Business Groups to Professional Managers, pages 1-64 National Bureau of Economic Research, Inc.

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