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Corporate Governance for Crooks? The Case for Corporate Virtue

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  • Margit Osterloh
  • Bruno S. Frey

Abstract

Corporate scandals are reflected in excessive top management compensation and fraudulent accounts. These scandals cause an enormous amount of damage, not only to the companies affected, but also to the market economy as a whole. As a solution, conventional wisdom suggests more monitoring and sanctioning of management. We argue that these efforts will create a governance structure for crooks. Instead of solving the problem, they make it worse. Selfish extrinsic motivation is reinforced. We suggest measures which clash with conventional wisdom: selecting employees with pro-social intrinsic preferences, de-emphasizing variable pay for performance and strengthening the participation and self-governance of employees. These measures help to increase intrinsically motivated corporate virtue and honesty.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 164.

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Handle: RePEc:zur:iewwpx:164

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Keywords: Corporate Virtue; fraud; intrinsic motivation; crowding theory; pay for performance; employee participation;

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  1. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  2. Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 109-126, Winter.
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  5. Ernst Fehr & Bettina Rockenbach, 2003. "Detrimental effects of sanctions on human altruism," Microeconomics 0305007, EconWPA.
  6. Fischbacher, Urs & Gachter, Simon & Fehr, Ernst, 2001. "Are people conditionally cooperative? Evidence from a public goods experiment," Economics Letters, Elsevier, vol. 71(3), pages 397-404, June.
  7. Patrick Bolton & Marco Becht & Alisa Roell, 2002. "Corporate Governance and Control," NBER Working Papers 9371, National Bureau of Economic Research, Inc.
  8. E. Fehr & John A. List, . "The Hidden Costs and Returns of Incentives - Trust and Trustworthiness among CEOs," IEW - Working Papers 134, Institute for Empirical Research in Economics - University of Zurich.
  9. Iris Bohnet & Bruno S. Frey & Steffen Huck, . "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," IEW - Working Papers 052, Institute for Empirical Research in Economics - University of Zurich.
  10. Elster, Jon, 1996. "Rationality and the Emotions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1386-97, September.
  11. Frey, Bruno S & Oberholzer-Gee, Felix & Eichenberger, Reiner, 1996. "The Old Lady Visits Your Backyard: A Tale of Morals and Markets," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1297-1313, December.
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