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Corporate Governance as an Institution to Overcome Social Dilemmas

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Corporate Governance and Business Ethics

Part of the book series: Studies in Economic Ethics and Philosophy ((SEEP,volume 39))

Abstract

During the current international financial crisis, the effectiveness of existing corporate governance institutions has been questioned both in the scientific community and in the media. A special focus of this discussion is on the containment of opportunistic behavior. In the corporate governance literature, the dominant approaches axiomatically assume individuals with self-interest or opportunistic behavior. The modern research stream of psychological economics, however, has shown that prosocial preferences exist and do matter. When the determinants of prosocial behavior are considered, the implications for the design of corporate governance institutions may clash with conventional wisdom. We suggest that the following measures help to overcome social dilemmas at the firm level: board representation of knowledge workers who invest in firm-specific human capital, attenuation of variable pay-for-performance, selection of directors and managers with prosocial preferences, and strengthening of employee participation in decision-making and control. With our approach, we make a rare attempt to apply psychological economics to a complex institution, namely corporate governance.

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Notes

  1. 1.

    Hertig’s (2009) proposal calls for an outsider representing the equity-oriented interests of managers and employees who collectively hold more than five percent of their firm’s equity.

  2. 2.

    Psychological economics is often referred to as behavioral economics. However, behavioral economics may be mistaken for the behaviorist approach in psychology, which only investigates observable stimulus-response relationships (cf. Watson 1913; Skinner 1965) and neglects psychological cognitive and motivational processes.

  3. 3.

    See Rabin (1998) and Camerer et al. (2004) for reviews.

  4. 4.

    See Osterloh and Frey (2006) for a detailed explanation of this arrangement.

  5. 5.

    See Deci and Ryan (2000) for a review.

  6. 6.

    See also Fehr and Gächter (2002).

  7. 7.

    See Frey et al. (2004) for an overview.

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Authors and Affiliations

  1. Warwick Business School, University of Warwick, Coventry, United Kingdom

    Margit Osterloh (Professor of Management Science, Professor of Management) & Bruno S. Frey (Professor of Behavioural Science, Professor of Economics)

  2. University of Zurich, Zurich, Switzerland

    Margit Osterloh (Professor of Management Science, Professor of Management) & Bruno S. Frey (Professor of Behavioural Science, Professor of Economics)

  3. Department of Business Administration, University of Zurich, Zurich, Switzerland

    Hossam Zeitoun (Doctoral Student and Assistant)

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  1. Margit Osterloh
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  1. Inst. Philosophie, Universität Bayreuth, Universitätsstr. 30, Bayreuth, 95447, Germany

    Alexander Brink

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Osterloh, M., Frey, B.S., Zeitoun, H. (2011). Corporate Governance as an Institution to Overcome Social Dilemmas. In: Brink, A. (eds) Corporate Governance and Business Ethics. Studies in Economic Ethics and Philosophy, vol 39. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-1588-2_3

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