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Behavioral Corporate Governance from a Regulatory Perspective: Potentials and Limits of Regulatory Intervention to Impact the Conduct of Corporate Actors

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Abstract

Usually, reflections on corporate governance take an inside perspective, i. e., a shareholder’s or a director’s point of view. Two perspectives are underrepre-sented in the discussion: firstly, an analysis from a regulatory perspective, i. e., from the government’s point of view; secondly, an analysis that draws on the recent literature on behavioral economics, experimental economics, and psychology. This paper tries to compensate for this gap in the literature.

The claim of this paper is that there is some potential for regulatory intervention to change corporate conduct by modifying the institutional design. However, this potential is limited. The paper addresses the task of institutional design by applying behavioral analysis and provides an analysis of concrete, real-world legal corporate governance institutions. It explores potentials for changing corporate conduct by accordingly shaping institutions on the basis of the foregoing behavioral analysis.

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References

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  31. Public goods theory in this form originates in a seminal piece by Paul A. Samuelson, “The Pure Theory of Public Expenditure”, 36 Rev. Econ. & Stat. (1954) p. 387. Cornes and Sandler provide a comprehensive overview of current public good theory in Richard Cornes and Todd Sandler, The Theory of Externalities, Public Goods, and Club Goods (Cambridge, Cambridge University Press 1996).

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  46. For instance, the loose coupling between regulation and behavior reminds one of Heisenberg’s Uncertainty Principle in physics, according to which it is not possible to predict where a particle will be with 100 percent certainty. Heisenberg’s Uncertainty Principle is a quantum mechanical principle that, in its most common form, states that it is not possible to simultaneously determine the position and momentum of a particle. Moreover, the better the position is known, the less well the momentum is known (and vice versa). For instance, one can say that an atom will be at some location with a 99 percent probability, but there will be a 1 percent probability it will be somewhere else (in fact, there will be a small but finite probability that it will be found across the universe). In addition, in Heisenberg’s quantum mechanical world, one can only speak in terms of probabilities. The distinction between deterministic and probabilistic approaches also exists in psychology research and theory. See, e. g., Gerd Gigerenzer, et al., “Probabilistic Mental Models: A Brunswikian Theory of Confidence”, 98 Psychol. Rev. (1991) p. 506.

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  97. Ibid., at p. 214.

  98. Ibid., at p. 215.

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  103. Ibid., at pp. 220–222.

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  108. Eberhard Schwark, in Eberhard Schwark, ed., Kapitalmarktrechtskommentar, 3rd edn. (Munich, Beck 2004) § 20a WpHG at pp. 44–45.

  109. See Pressemitteilung des Bundesgerichthofs No. 87/2004 of 19 July 2004 and BGH II ZR 217/03, BGH II ZR 218/03, and BGH II ZR 402/02.

  110. Langevoort, supra n. 12, at p. 157.

  111. Ibid., at p. 157.

  112. See supra section 2.3.3.

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  115. Cox et al., supra n. 113, at p. 630.

  116. The Sarbanes-Oxley Act of 2002 has brought about a reform of the accounting standards in the United States. See supra n. 8.

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  118. Ibid., at pp. 969–971.

  119. Pinto, supra n. 36, at pp. 258–259.

  120. Patrik C. Leyens, “Deutscher Aufsichtsrat und U.S.-Board: ein- oder zweistufiges Verwaltungssystem?”, 67 RabelsZ (2003) p. 57 at p. 71; Pinto, supra n. 36, atp. 261.

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  121. Ibid., at pp. 57, 71.

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  123. Ibid., atp. 139.

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  126. Langevoort, supra n. 5, at p. 797.

  127. For a review of the finance literature, see only Sanjai Bhagat and Bernhard Black, “The Uncertain Relationship between Board Composition and Firm Performance”, 54 Bus. Law. (1999) p. 921 at pp. 921–922.

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  130. Cox and Munsinger, supra n. 4.

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  132. Langevoort, supra n. 5, at pp. 810–811.

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  134. Business Roundtable, Statement on Corporate Governance 10 (September 1997), available at: http://www.brt.org. The number of directors is usually set in the by-laws or certificate, and they elected by the shareholders at their annual meeting.

  135. National Association of Corporate Directors (NACD), Public Company Governance Survey 1999–2000 (October 2000) at p. 7 (44 percent between seven and nine members).

  136. Lipton and Lorsch, supra n. 3, at p. 64.

  137. Ibid., at p. 64.

  138. See Klaus J. Hopt, “The German Two-Tier Board: Experience, Theories, Reforms”, in Klaus J. Hopt, et al., eds., Comparative Corporate Governance. The State of The Art and Emerging Research (Oxford, Clarendon Press 1998) p. 227 at pp. 241–42; Leyens, supra n. 120, at p. 81. However, this is different in the coal and steel industry where special provisions apply.

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  139. Gesetz über die Mitbestimmung der Arbeitnehmer vom 4.5.1976, BGBl. I, S. 1153. In smaller corporations, employees get one third of the positions on the council.

  140. Leyens, supra n. 120, at pp. 81–82.

  141. Ibid., at pp. 81–82. § 110 AktG obliges the supervisory council to have a session twice a year.

  142. Wolfgang Bernhardt, “Aufsichtsrat — die schönste Nebensache der Welt?”, 195 ZHR (1995) p. 310 at pp. 311–312; Hopt, supra n. 138; Manuel R. Theisen, “Empirical Evidence and Economic Comments on Board Structure in Germany”, in Hopt et al., supra n. 138, p. 259 at pp. 261–262.

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  143. Martina Deckert, “Effektive Überwachung der AG-Geschäftsführung durch Ausschüsse des Aufsichtsrates”, 17 ZIP (1996) p. 985 at pp. 989–992; Marcus Lutter, “Vergleichende Corporate Governance — Die deutsche Sicht”, 30 ZGR (2001) p. 224 at pp. 227–237.

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  144. See, e. g., Bernhardt, supra n. 142, at p. 316. Note that according to § 100 II No. 1 AktG, one individual is not allowed to be a member of more than ten supervisory councils at the same time.

  145. Lipton and Lorsch, supra n. 3, at p. 69 (“Boards should meet at least bimonthly and each meeting should take a full day, including committee sessions and other related activities. One meeting each year should be a two or three day strategy session.”).

  146. Jensen, supra n. 45, at p. 866; Lipton and Lorsch, supra n. 3, at p. 70.

  147. Langevoort, supra n. 117, at p. 972.

  148. Langevoort, supra n. 12, at p. 156.

  149. French law also contemplates employee participation, but only as an optional feature. In contrast, US law is completely silent on this issue. Proposals for the creation of labor directors emerge consistently in the United States.

  150. Gesetz über die Mitbestimmung der Arbeitnehmer vom 4.5.1976, BGBl. I, S. 1153. In smaller corporations, employees get one third of the positions on the council; see Klaus J. Hopt, “Gemeinsame Grundsätze der Corporate Governance in Europa?”, 29 ZGR (2000) p. 779 at pp. 800–802.

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  152. O’Connor, supra n. 151, at pp. 961–965.

  153. See supra n. 97 and accompanying text.

  154. See Frankfurter Allgemeine Zeitung, 18 September 2004, at p. 11.

  155. See Rakesh Khurana, “Vorstände sollten ihre Gehälter nicht offen legen”, Frankfurter Allgemeine Zeitung, 23 August 2004, at p. 14.

  156. In the United States, independent directors can also be compensated by means of stock options. See Lipton and Lorsch, supra n. 3, at p. 69. In contrast to this, the German Federal Supreme Court (Bundesgerichtshof) has recently decided that the directors of the supervisory board (who are comparable to outside directors under US law) are no longer allowed to receive stock options as part of their compensation. See BGH II ZR 316/02 of 16 February 2004 (holding that the stock options’ value depends on the stock price, which can be affected by well-directed arrangements of circumstances of the management in a legal or illegal way, and that the stock price is not always a reliable benchmark for the internal value and the long-term success of a firm. The court thus sees compensation that consists at least partly of stock options as a threat to the control function of the supervisory board.).

  157. See only Jensen supra n. 45, at pp. 864–865.

  158. See Weinstein, supra n. 82, at p. 814.

  159. Simon Gervais, et al., Overconfidence, Investment, Policy and Stock Options, unpublished working paper (24 July 2003) at pp. 22–23, 27, available at: http://faculty.haas.berkeley.edu/odean/papers/Managers/GervaisHeatonOdean0703.pdf.

  160. Camerer and Malmendier, supra n. 2, at p. 34.

  161. Ibid., at p. 34.

  162. See Janis, supra n. 58, at p. 206 (“Until the explanation of groupthink in terms of mutual support to cope with threats of self-esteem is verified by systematic research, it is risky to make huge inferential leaps from theory to the practical sphere of prevention. Ultimately, a well-substantiated theory should have valuable practical applications to the formulation of effective prescriptions. … But until we know we have a good theory — one that is well supported by controlled experiments and systematic correlational research, as well as by case studies — we must recognize that any prescriptions we draw up are speculative inferences based on what little we know, or think we know, about when and why groupthink occurs. Still, we should not be inhibited from drawing tentative inferences — so long as we label them as such — in order to call attention to potentially useful means of prevention.”).

  163. See Janis, supra n. 58, at p. 208.

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  1. Junior Civil Law Notary, Rhenish Notary Chamber, Cologne, Germany

    Guido Kordel Ph.D. (Dr. iur.), LL.M., J.D.

  2. University of Bonn, Germany

    Guido Kordel Ph.D. (Dr. iur.), LL.M., J.D.

  3. University of Chicago, USA

    Guido Kordel Ph.D. (Dr. iur.), LL.M., J.D.

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Kordel, G. Behavioral Corporate Governance from a Regulatory Perspective: Potentials and Limits of Regulatory Intervention to Impact the Conduct of Corporate Actors. Eur Bus Org Law Rev 9, 29–62 (2008). https://doi.org/10.1017/S1566752908000293

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