Law, Norms, and the Breakdown of the Board: Promoting Accountability in Corporate Governance
Year: 2006
Type: preprint
Abstract: This Article considers the dominant claim in corporate law literature that extra-legal mechanisms such as markets and social norms provide adequate safeguards against corporate mismanagement and opportunism. After noting recognized deficiencies in the arguments from market discipline, the Article draws on psychological insights to show that certain behavioral phenomena prevent social norms from appropriately constraining corporate conduct. It then argues that because neither markets nor social norms can sufficiently discipline corporate officials, a credible accountability mechanism is necessary to prevent director conduct standards from deteriorating. Unfortunately, an inveterate tradition of judicial deference in corporate law has undermined the role of fiduciary duty litigation as a mechanism for accountability. To promote greater accountability in corporate governance, the Article recommends reforms to the director liability regime. It argues that litigation and settlement practices should require negligent directors to make personal payments toward settlements and damage awards, and that such payments should be calibrated based on a director's ability to pay. This proposal addresses two main weaknesses in the current director liability regime: (1) judicial nullification and (2) legitimacy concerns regarding the scope of directors' liability risks.
Source: SSRN Electronic Journal
Author: Renee M. Jones
Institution: Boston College
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2262525717