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Corporate Governance: Eine Prinzipal-Agenten-Beziehung, Team-Produktion oder ein soziales Dilemma?

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... For interesting economic approaches motivating this study, seeBlair (1998),Boatright (2002),Hill and Jones (1992),Quinn and Jones (1995),Osterloh and Frey (2005). See also the interesting discussion byBrink (2010). ...
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Today, there is an almost overwhelming variety and range of approaches that strive for a clear definition of stakeholder. In this article, the author aims to develop a strictly economic concept of stakeholder management. The theoretical underpinning for this endeavour is the economics of governance, which is defined as the science of the governance, management and control of cooperative relations through adaptively efficient governance structures. According to this perspective, companies are not just one form of governance of stakeholder relations; they should rather be understood as a nexus of stakeholder relations in a constitutive sense. The governance of this network is defined as a two-step process of identifying and prioritizing a team’s relevant stakeholders, which in turn are defined as resource owners who together constitute and operatively reproduce a company. From an economics of governance point of view, a firm is thus defined as a contractual nexus of stakeholder resources and stakeholder interests, whose function is the governance, i.e., the management and control of the resource owners with the aim of creating economic added value and distributing cooperative rent. It is through this theoretical lens that this article discusses the conventional theories of stakeholder management. The focus here is primarily on the widely acknowledged weaknesses of the stakeholder theory – such as the fact that it does not offer a generally recognized definition of what a stakeholder is, but also and above all on the major theoretical shortcomings with regard to identifying and prioritizing the stakeholders. Finally, this article outlines an allocation mechanism for distributing the team’s cooperative rent.
... Im Kontrast dazu steht die stewardship theory, bei der von einem kooperativen und vertrauensvollen Akteur ausgegangen wird (Davis, Schoorman, & Donaldson, 1997;Donaldson & Davis, 1991). Diesem Ansatz zufolge wäre die Übernahme eines Mandats primär auf intrinsische Anreize zurückzuführen, wie zum Beispiel einem pro-organisationalen Interesse (Guerrero, Lapalme, & Séguin, 2015) oder der Identifikation mit dem Unternehmen und seinen Interessengruppen (Guerrero & Séguin, 2012;Hillman, Nicholson, & Shropshire, 2008 (Boivie et al., 2012;Lorsch & MacIver, 1989), den Niederlanden (de Jong et al., 2014) und Deutschland (Jünger, 2013;Walther, Möltner, & Morner, 2017) (Deci et al., 1999;Osterloh & Frey, 2005). Empirische Analysen zeigen zudem, dass die verschiedenen Motivationssubtypen in der Regel parallel zueinander auftreten und eine handlungsweisende Gesamtmotivation bilden (Gagné & Deci, 2005;Janssen, van Vuuren, & de Jong, 2014) Interesse an der Wahrung spezifischer Arbeitnehmerinteressen (Höpner & Müllenborn, 2010) und der langfristigen Unternehmensentwicklung (Huse et al., 2009;Jansen, 2013), während sich die AnteilseignervertreterInnen eher von Aktionärs-und Eigeninteressen leiten lässt . ...
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Der Beitrag fragt danach, welche Erkenntnisse gewonnen werden, wenn die professionelle Eigenlogik der (Chef-)Ärzteschaft in deutschen Krankenhäusern mit dem Filter der sog. Principal-Agent-Theorie gleichsam methodologisch eingeklammert wird und Entwicklungen in den ökonomischen Machtbeziehungen zwischen der (Chef-)Ärzteschaft und ihren Arbeitgebern fokussiert werden. Auf diese Weise wird der Wandel der Position der Ärzteschaft als Auseinandersetzung einer Profession mit unterschiedlichen wirtschaftlichen Zwängen rekonstruiert. Es zeigen sich eine Reihe von paradoxen Effekten: Einerseits drohen der Profession Machtverluste, andererseits enaktiert der Versuch, Chefärzte ökonomisch zu disziplinieren (u.a. durch die Einschränkung der Privatliquidation), diese erneut zu ökonomisch starken Akteuren, die – etwa indem sie die Flucht in den Honorararztstatus antreten – das Spiel wieder zu ihren Gunsten wenden können.
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The article aims to develop a critical perspective on modern systems of performance management in organizations. It emphazises and analyses the normative context of performance management. It is argued that modern performance management potentially causes anomic phenomenons in organizations. Here, anomie gets defined as weakness of the newly given norms of performing. This weakness results from discrepancies in the normative and factual design of the performance managegement systems. Referring to this, the article differentiates between four types of discrepancies and discusses relating reactions by organizational members. In general, it is supposed that new systems of performance management bear the danger to destabilize organizational premises of efficient performing and threaten the normative stability of organizations in the long run.
Chapter
This chapter focuses on the economic concept of stakeholder management and defines the firm as a form of governance of stakeholder relationship. Stakeholders are defined as the owners or possessors of resources or competencies, which they contribute to a team. In doing so, Stakeholders consent to concluding a formal or informal contractual relationship. The approach suggests to define the governance of stakeholder relationships as a two-stage process, at first of identifying and then of prioritizing the relevant stakeholders of a team, both in regard to its constitution and to the implementation of its specific transactions. The nature of the firm can then be determined as a contractual nexus of stakeholder resources and stakeholder interests, whose function lies in the governance, namely the leadership, management and monitoring of the resource owners, with the aim of economic value creation and the distribution of a cooperation rent. The concept of a governance of stakeholder relationships by means of identification and prioritization developed here aims at creating a unified basis for the management of stakeholder relationships from a governance-economic perspective. Regardless of the form of contract that makes an individual or a group of actors an actual stakeholder, the selection and decision process must be organized in accordance with unified indicators. It is argued that the failure to do so has to be identified as a weakness of the current discussions in democracy theory and business ethics on stakeholder management, which are exclusively tailored to suit the special case of the NGOs or other actors in civil society. Investors, employers or suppliers as possessors of resources and representatives of interests however are simply ignored. This, so the argument runs, is possible from the viewpoint of political or ethical theories but not from the perspective of a general theory of stakeholder management.
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This chapter is based on the theoretical integration of stakeholder management in a governance approach and attempts to answer questions on the boundaries of a firm, the nature of its relationship to society and the nature of the firm in general. The basic assumption is that the firm can be understood as a social form of governance for bilateral and multilateral, contractually organized stakeholder relationships. In this outline stakeholders are self-interested owners of resources who form a team for the utilization of these resources and the creation of economic added value as long as a cooperation rent can be achieved for all the participants. As the owners of resources, stakeholders constitute and reproduce a team through their transactions and they are not, as a wide-spread assumption in the discussion suggests, to be understood as “claimant groups” external to the firm but as its internal assets, whose efficiency and effectiveness for the team and its members depend on the form and the organization of its governance structure. In this theoretical perspective economic cooperation is always the result of social cooperation and stakeholder dialogues, multi-stakeholder forums, deliberative discourses etc. represent an opportunity for managing the resources of a team, which is needed because of the specific nature of the resources involved in the implementation of a particular transaction. In this sense corporate governance cannot be restricted to a monitoring function. Instead it must be seen as the capacity to lead, manage and monitor the resources of a cooperative project designed to generate factor income and a cooperation rent. This approach implies that stakeholder management is a fundamental strategic task of corporate governance and not simply the business of a firm’s communication department. This includes participation in networks of stakeholders which have the task of contributing to the solution of the social and hence also of the economic problems of the firm.
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Through a meta-analytic review of the empirical literature on the determinants of CEO pay, this study tests the hypothesized relationships between firm size, performance, and CEO pay. We show that firm size accounts for more than 40% of the variance in total CEO pay, while firm performance accounts for less than 5% of the variance. We also show that pay sensitivities are relatively similar for both changes in size (5% of the explained variance in pay) and changes in financial performance (4% of the explained variance in pay). The meta-analysis also suggests that moderator variables may play an important role, but we were unable to test for this.
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This article presents an analysis of 35 years of published experiments testing decision making in prisoners' dilemmas. The objective is to begin to reconnect the theory and the evidence of rational behavior by accumulating the experience of the laboratory and examining this record for those factors that consistently altered subjects' choices. It is shown that a model of pure self-interest is usually inconsistent with the results of experimental decision making, predicting either the wrong sign, as in the case of monetary stakes, or ignoring influential variables, such as the content of instructions. This incongruity is widest with respect to the role of language in encouraging cooperation.
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Knowledge is too problematic a concept to make the task of building a dynamic knowledge-based theory of the firm easy. We must also distinguish the theory from the resource-based and evolutionary views. The paper begins with a multitype epistemology which admits both the pre- and subconscious modes of human knowing and, reframing the concept of the cognizing individual, the collective knowledge of social groups. While both Nelson and Winter, and Nonaka and Takeuchi, successfully sketch theories of the dynamic interactions of these types of organizational knowledge, neither indicates how they are to be contained. Callon and Latour suggest knowledge itself is dynamic and contained within actor networks, so moving us from knowledge as a resource toward knowledge as a process. To simplify this approach, we revisit sociotechnical systems theory, adopt three heuristics from the social constructionist literature, and make a distinction between the systemic and component attributes of the actor network. The result is a very different mode of theorizing, less an objective statement about the nature of firms ‘out there’ than a tool to help managers discover their place in the firm as a dynamic knowledge-based activity system.
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Given assumptions about the characteristics of knowledge and the knowledge requirements of production, the firm is conceptualized as an institution for integrating knowledge. The primary contribution of the paper is in exploring the coordination mechanisms through which firms integrate the specialist knowledge of their members. In contrast to earlier literature, knowledge is viewed as residing within the individual, and the primary role of the organization is knowledge application rather than knowledge creation. The resulting theory has implications for the basis of organizational capability, the principles of organization design (in particular, the analysis of hierarchy and the distribution of decision-making authority), and the determinants of the horizontal and vertical boundaries of the firm. More generally, the knowledge-based approach sheds new light upon current organizational innovations and trends and has far-reaching implications for management practice.
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In this paper we provide experimental evidence indicating that incentive contracts may undermine voluntary cooperation. This suggests that explicit incentives may have costly side effects that have been largely neglected by economists. In our experiments the undermining effect is so strong that the incentive contracts are less efficient than contracts without any incentives. Buyers, who are in the role of principals, nonetheless, prefer the incentive contracts because they allow them to appropriate a much larger share of the (smaller) total surplus and are, hence, more profitable for them. The undermining of voluntary cooperation through incentives is, in principle, consistent with models of inequity aversion and reciprocity. Additional experiments show, however, that the reduction of voluntary cooperation through incentives is partly due to a framing effect. If the incentive is framed as a price deduction the reduction of voluntary cooperation is much stronger compared to a situation where the incentive is framed as a bonus paid on top of a base price.
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Despite the many undesirable outcomes of corporate misconduct, scholars have an inadequate understanding of corporate misconduct's causes and mechanisms. We extend the behavioral theory of the firm, which traditionally assumes away the possibility of firm impropriety, to develop hypotheses predicting that top management incentive compensation and poor organizational performance relative to aspirations increase the likelihood of financial misrepresentation. Using a sample of financial restatements prompted by accounting irregularities and identified by the U.S. Government Accountability Office, we find empirical support for both incentive and relative performance influences on financial statement misrepresentation.
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- The process of globalization enables multinational enterprises to source, produce and sell on a world-wide basis. In many cases multinational companies operate in countries with poor social and environmental conditions.- The power of individual nation states to establish and control the rules of the economic system is fading, both in the industrialized and in the developing countries. Instead, there is a downward spiral of social and environmental standards. At the same time, the efforts of intergovernmental organizations to create a new world order have not made much progress.- Under these conditions, the multinational firm must fill the gap between economic possibilities and ethical requirements, i.e. the multinational firm must behave as a moral actor. The economic power of multinational firms should be used to define and to enforce humane working conditions world-wide.- The U.S. Model Business Principles are based on this idea. However, their legitimacy can be questioned. Therefore, one has to consider their underlying philosophical grounding and has to reconsider the economic motivations for multinational firms to conduct themselves in an efficient and ethically sound way.- For maintaining global peace and stability the confidence of people in the fairness of global competition is necessary. In order to preserve this confidence, joint efforts by governments, MNEs, intergovernmental organizations, and NGOs are necessary. Today, MNEs are key actors in this endeavor.
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Das Lehrbuch "Motivation und Handeln" gilt als Standardwerk der Motivationspsychologie. Die 3. Auflage wurde komplett überarbeitet und um einige Kapitel ergänzt. Dabei wurden die Modelle, Theorien und die Übersicht über empirische Arbeiten aktualisiert; integrative Modelle und viele Querverweise zielen auf die im Fach wichtige Integration von volitionaler und motivationaler Perspektive ab. Auch die neuen evolutions- und biopsychologischen Perspektiven werden ausführlich behandelt. Neu in der 3. Auflage ist auch die lernfreundliche Didaktik: Hervorgehobene Schlüsselbegriffe und Kapitelzusammenfassungen, Anwendungsbeispiele aus Schule, Arbeitsleben, Familie und Freizeit, Boxen mit klassischen oder originellen Studien sowie Fragen und Antworten zur Wissensüberprüfung. "Motivation und Handeln" liefert somit in der Neuauflage einen umfassenden und lebendigen Überblick über den derzeitigen Stand der Motivationsforschung. Für den Psychologie-Studenten im Grundstudium ist dieses Lehrbuch ein Studienbegleiter; für Fortgeschrittene, Lehrende und Forscher hat es sich als Handbuch und Nachschlagewerk bewährt.
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Environments with public goods are a wonderful playground for those interested in delicate experimental problems, serious theoretical challenges, and difficult mechanism design issues. In this chapter I will look at one small but fundamental part of the rapidly expanding experimental research. In Section 1, I describe a very simple public good experiment - what it is, what some theories predict, what usually happens, and why we should care - and then provide a methodological and theoretical background for the rest of the chapter. In Section 2, I look at the fundamental question: are people selfish or cooperative in volunteering to contribute to public good production? We look at five important early experiments that have laid the foundations for much that has followed. In Section 3, I look at the range of experimental research which tries to identify and study those factors which increase cooperation. In order to help those new to experimental work I have tried to focus on specific experimental designs in Section 2 and on general results and knowledge in Section 3. The reader will find that the public goods environment is a very sensitive one with much that can affect outcomes but are difficult to control. The many factors interact with each other in unknown ways. Nothing is known for sure. Environments with public goods present a serious challenge even to skilled experimentalists and many opportunities for imaginative work.
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I: Background.- 1. An Introduction.- 2. Conceptualizations of Intrinsic Motivation and Self-Determination.- II: Self-Determination Theory.- 3. Cognitive Evaluation Theory: Perceived Causality and Perceived Competence.- 4. Cognitive Evaluation Theory: Interpersonal Communication and Intrapersonal Regulation.- 5. Toward an Organismic Integration Theory: Motivation and Development.- 6. Causality Orientations Theory: Personality Influences on Motivation.- III: Alternative Approaches.- 7. Operant and Attributional Theories.- 8. Information-Processing Theories.- IV: Applications and Implications.- 9. Education.- 10. Psychotherapy.- 11. Work.- 12. Sports.- References.- Author Index.
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This paper examines the influence of surveillance and sanctioning systems on cooperative behavior in dilemma situations. The first study provides evidence that a weak sanctioning system can actually result in less cooperation than no sanctioning system at all and suggests that one reason for this effect is that sanctions affect the type of decision that individuals perceive that they are making, prompting a concentration on the business versus ethical aspects of the decision. Based on this finding, a theoretical model is then presented that postulates that the relationship between sanctions and cooperation is due to both a signaling effect, in which sanctions influence the type of decision that is made, and a processing effect, in which the decision processing that occurs, including whether or not the strength of the sanction is considered, is dependent on the decision frame that has been evoked. A second study provides support for the processing effect hypothesis. Theoretical and managerial implications of these findings are discussed.
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'If there is anything that can invariably be experienced in modern economies, then it is their incessant innovative transformation. In this fine volume Buenstorf brings together a selection of cutting edge research papers which jointly give the reader a grasp of how these innovative changes come about. The volume highlights how evolutionary economics keeps track of the transformation processes at various levels. With its well chosen focus on behavioral studies, organizational learning and development, and industrial genealogy the volume covers the currently most dynamic topics in the field.' - Ulrich Witt, Max Planck Institute of Economics, Germany.
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Studies in three thematic lines of research have manipulated parameters of individual monetary incentive systems to determine whether those parameters were functionally related to performance. Studies have examined: (a) the size of the percentage of total pay and base pay earned in incentive pay; (b) various ratio schedules of monetary reinforcement; and (c) linear, accelerating, and decelerating piece rate pay. The review revealed that individual monetary incentives plus feedback improved performance in comparison to hourly pay plus feedback in studies in all three thematic research lines. However, performance levels were not functionally related to (a) the size of the percentage of total pay or base pay earned in incentive pay for percentages that ranged from 3% to 100% of a person's total pay and base pay; (b) the per piece incentive amount; (c) the amount earned in total pay or total incentive pay; (d) the ratio schedule of delivery for CRF, FR3, VR2, VR3, and VR4 schedules; or (e) linear, accelerating, or decelerating piece rate pay. Taken together, the data suggest that, at least for the parameters investigated to date, the most critical determinant of performance is the ratio schedule contingency between performance and pay; that is, a relationship in which individuals earn a specified amount of money for the number of work units they complete. They also suggest that once a ratio relationship exists, variations in the parameters of individual monetary incentive systems may not greatly affect performance. Relatively few studies, however, have been con-ducted and further research is required.
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Andreas Ortmann and Mark Schlesinger, in their article “Trust, Repute, and the Role of Nonprofit Enterprise,” examine what they term “the trust hypothesis,” namely “the claim that asymmetric information in the markets for certain goods and services can explain the existence of nonprofit enterprise in those markets” (this volume). There is much that is sensible in what they say, and they have performed a valuable service in pulling together some of the more recent empirical literature on asymmetric information in markets heavily populated with nonprofit firms. I have some concerns, however, both with respect to the authors’ formulation of the trust hypothesis and with their approach to its verification.
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In this paper we review the academic evidence on earnings management and its implications for accounting standard setters and regulators. We structure our review around questions likely to be of interest to standard setters. In particular, we review the empirical evidence on which specific accruals are used to manage earnings, the magnitude and frequency of any earnings management, and whether earnings management affects resource allocation in the economy. Our review also identifies a number of opportunities for future research on earnings management.
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Boards of directors serve two important functions for organizations: monitoring management on behalf of shareholders and providing resources. Agency theorists assert that effective monitoring is a function of a board's incentives, whereas resource dependence theorists contend that the provision of resources is a function of board capital. We combine the two perspectives and argue that board capital affects both board monitoring and the provision of resources and that board incentives moderate these relationships.
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There is a rich debate in organizational theory about the contribution of supervisors to group process and performance, and about the span of control needed to make that contribution. In this paper, I summarize the debate and develop competing hypotheses. These competing hypotheses are tested using multisite survey and archival measures, and interpreted using qualitative data from the same study. I find that small supervisory spans improve performance through their positive effects on group process. In particular, supervisors with smaller spans achieved higher levels of relational coordination among their direct reports. Qualitative data suggest that supervisors with smaller spans achieved these results through working with, and providing intensive coaching and feedback to their direct reports.
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Abstract—With the widespread emergence of required community-service programs comes a new opportunity to examine the effects of requirements on future behavioral intentions. To investigate the consequences of such “mandatory volunteerism” programs, we followed students who were required to volunteer in order to graduate from college. Results demonstrated that stronger perceptions of external control eliminated an otherwise positive relation between prior volunteer experience and future intentions to volunteer. A second study experimentally compared mandates and choices to serve and included a premeasured assessment of whether students felt external control was necessary to get them to volunteer. After being required or choosing to serve, students reported their future intentions. Students who initially felt it unlikely that they would freely volunteer had significantly lower intentions after being required to serve than after being given a choice. Those who initially felt more likely to freely volunteer were relatively unaffected by a mandate to serve as compared with a choice. Theoretical and practical implications for understanding the effects of requirements and constraints on intentions and behavior are discussed.
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In this 1990 Harvard Business Review classic, the authors begin by correcting a number of widespread misconceptions: With the aim of reversing these trends, the authors offered three recommendations: Since publication of this article in 1990, the first and third of these goals have largely been accomplished (while the second has proved more elusive).
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A tremendous amount of research has explored the relationship, between managerial pay and firm performance. We argue that this research has generally been limited because it ignores other criteria that can be used to determine managerial pay, as well as the influence of a firm's governance structure and various contingencies. Our analysis leads to a general framework for research on executive pay. This framework is used to evaluate the present state of research in this field and the contribution of the six papers in this special research forum, and to identify directions for further research.
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Economics and psychology are both sciences of human behaviour. This paper gives a survey of their interaction. First, the changing relationship between the two sciences is discussed: while economics was once imperialistic, it has become a science inspired by psychological insights. In order to illustrate this, recent developments and evidence for three major areas are presented: bounded rationality, non-selfish behaviour, and the economics of happiness.
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The abstract for this document is available on CSA Illumina.To view the Abstract, click the Abstract button above the document title.
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Cooperation in social dilemma situations is often explained in terms of egoistic incentives. These include: (i) explicit side payments in the form of rewards for cooperation and negative sanctions for defection, (ii) expectations of reciprocal altruism from others involved, and (iii) internalized positive utilities (e.g., an enhanced self-esteem) for ‘doing the thing’ or negative ones (e.g., a bad conscience) for defecting. Such egoistic explanations assumed that cooperation can occur only when the dilemma situation is, in effect, transformed into one not involving a dilemma.
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Careful review of extant research addressing the relationships between board composition, board leadership structure, and firm financial performance demonstrates little consistency in results. In general, neither board composition nor board leadership structure has been consistently linked to firm financial performance. In response to these findings, we provide meta-analyses of 54 empirical studies of board composition (159 samples, n = 40,160) and 31 empirical studies of board leadership structure (69 samples, n = 12,915) and their relationships to firm financial performance. These—and moderator analyses relying on firm size, the nature of the financial performance indicator, and various operationalizations of board composition—provide little evidence of systematic governance structure/financial performance relationships. © 1998 John Wiley & Sons, Ltd.
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The study of social dilemmas is the study of the tension between individual and collective rationality. In a social dilemma, individually reasonable be-havior leads to a situation in which everyone is worse off. The first part of this review is a discussion of categories of social dilemmas and how they are modeled. The key two-person social dilemmas (Prisoner's Dilemma, Assur-ance, Chicken) and multiple-person social dilemmas (public goods dilem-mas and commons dilemmas) are examined. The second part is an extended treatment of possible solutions for social dilemmas. These solutions are or-ganized into three broad categories based on whether the solutions assume egoistic actors and whether the structure of the situation can be changed: Mo-tivational solutions assume actors are not completely egoistic and so give some weight to the outcomes of their partners. Strategic solutions assume egoistic actors, and neither of these categories of solutions involve changing the fundamental structure of the situation. Solutions that do involve chang-ing the rules of the game are considered in the section on structural solutions. I conclude the review with a discussion of current research and directions for future work.
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This chapter criticizes current contractarian views of the firm in law and economics, reminding that the forgotten merit of the corporate form of enterprise is precisely the separation between individual investors/claimants and the firm as a juridical person and separate entity, that is not 'owned' by either investors, nor managers, nor any other participant in the enterprise. Furthermore, it is argued - and corroborated with historical evidence on the emergence of corporate law in the US and on the case of Singer - that shareholders themselves 'are better off because they have, in the corporation, a mechanism for committing capital to an enterprise and yielding control rights to directors almost irrevocably'. In other terms, the separation of ownership and control, rather than being 'a problem' and in spite of entailing some costs, is the very virtue of the corporate form. The chapter concludes with a review of implications for devising effective institutions, especially in transition economies.
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This Article evaluates two Possible explanations for why shareholders of public corporations tolerate board control of corporate assets and outputs: the widely accepted monitoring hypothesis, which posits that shareholders rely on boards primarily to control the "agency costs" associated with turning day-to-day control over the firm over to self-interested corporate executives, and the mediating hypothesis, which posits that shareholders also seek to "tie their own hands" by ceding control to directors as a means of attracting the extracontractual, firm-specific investments of such stakeholder groups as executives, creditors, and rank-and-file employees. Part I reviews each hypothesis and concludes that each is theoretically plausible and internally consistent, and that the validity of each theory must be established or rejected on the basis of empirical evidence. Part II evaluates the available empirical evidence, including new evidence on charter provisions of initial public offerings, and concludes that, as both a positive and a normative matter, corporate takeover law is consistent with the view that directors are not just monitors, but also perform a mediating function. Finally, Part III discusses future directions far empirical research, identifies some pitfalls to be avoided, and concludes that the current empirical evidence favors the mediating model.
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One of the most important questions in corporate governance is how directors of public corporations can be motivated to serve the interests of the firm. Directors frequently hold only small stakes in the companies they manage. Moreover, a variety of legal rules and contractual arrangements insulate them from liability for business failures. Why then should we expect them to do a good job? Conventional corporate scholarship has great difficulty wrestling with this question, in large part because conventional scholarship usually adopts the economist's assumption that directors are rational actors motivated purely by self-interest. This homo economicus model of behavior may be fundamentally misleading when applied to corporate directors. The institution of the corporate board is premised on the expectation, and the experience, of director altruism, in the form of a sense of obligation to the firm and its shareholders. As a result, to properly understand the role and conduct of corporate directors, we must take account of the empirical phenomenon of other-regarding behavior. One potential starting point for such a project can be found in the extensive evidence that has been developed over the past four decades on other-regarding behavior among strangers in experimental games. This evidence demonstrates that cooperative, altruistic behavior is in fact quite common. More important, it is predictable. A variety of factors can reliably increase, or decrease, the incidence of cooperation observed in experimental games. These results may offer a foundation for building a model of human behavior that is both more accurate and more useful than the homo economicus model. They also carry important implications for how we select, educate, regulate, and compensate corporate directors.
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This article discusses the potential promise and limits of oversight of corporate managers by major institutional investors. I discuss the reasons to believe that, at least for systemic issues that arise at many firms, there can be value is assigning one set of loosely watched agents (institutional money managers) to watch another set (corporate managers). This is partly because, as long as it takes a number of institutions to strongly influence corporate actions, the institutions can also watch each other, thus reducing the risk that any one of them will extract private benefits from the firm. The case for shared institutional voice (with six or ten institutions, often different types of institutions, exercising joint influence) is stronger than the case for direct institutional control of a firm by a particular institution. In a companion paper, The Value of Institutional Investor Monitoring: The Empirical Evidence, UCLA Law Review, Vol. 39, pp. 895-939 (1992), http://ssrn.com/abstract=1132063, I survey the empirical evidence on the value of large shareholder oversight of managers.
Article
Conventional legal and economic analysis assumes that opportunistic behavior is discouraged and cooperation encouraged within firms primarily through the use of legal and market incentives. This presumption is embodied in the modern view that the corporation is best described as a "nexus of contracts," a collection of explicit and implicit agreements voluntarily negotiated among the selfishly rational parties who join in the corporate enterprise. In this article we take a different approach. We start from the observation that, in many circumstances, legal and market sanctions provide at best imperfect means of regulating behavior within the firm. We consider an alternate hypothesis: that corporate participants often cooperate with each other not because of external constraints, but because of internal ones. In particular, we argue that the behavioral phenomena of internalized trust and trustworthiness play important roles in encouraging cooperation within firms. In support of this claim, we survey the extensive experimental evidence that has been produced over the past four decades on human behavior in "social dilemmas." This evidence demonstrates that internalized trust is a common phenomenon; that it is at least in part learned rather than innate; and that different individuals vary in their inclinations toward trust. Most important, the experimental evidence indicates that decisions whether or not to trust others are in large part determined by social context rather than external payoffs. By altering social context - subjects' perceptions of others' beliefs, expectations, likely actions, and relationships to themselves - experimenters can reliably produce everything from nearly universal trust, to an almost complete absence of trust, in subjects in social dilemmas. In other words, most people behave as if they have two personalities or preference functions. One is competitive and self-regarding. The other is cooperative and other-regarding. Social framing is key in triggering when the cooperative personality emerges. These behavioral findings carry important implications for corporate law. For example, in this article we demonstrate first that the phenomenon of trust offers insight into the substantive structure of corporate law and particularly the nature and purpose of that elusive legal concept, fiduciary duty. In the process, it adds weight to the claims of anticontractarian corporate scholars who argue against the notion that corporate officers and directors should be free to contract out of their fiduciary duty of loyalty. Second, the experimental evidence on trust sheds light on how corporate law works, by suggesting how judicial opinions in corporate cases direct corporate officers' and directors' behavior not only by altering their external incentives but also by changing their internalized preferences. This possibility helps explain the notoriously puzzling relationship between the duty of care and the business judgment rule. Third, trust highlights the limited power of law by explaining how cooperative patterns of behavior can sometimes develop within firms even when external incentives, such as legal sanctions, are unavailable or ineffective. In the process, it underscores the dangers of the contractarian approach by suggesting how an excessive emphasis on external sanctions - including formal contract and even the rhetoric of contract - may be not only ineffective but counterproductive, serving to undermine trust and trustworthiness within the firm.
Article
Currently, we are in the midst of a reexamination of chief executive officer (CEO) remuneration that has more than the usual amount of energy and substance. While much of the fury over CEO pay has been aimed at executives associated with accounting scandals and collapses in the prices of their company's shares, the controversies over GE CEO Jack Welch and NYSE CEO Richard Grasso signal a watershed. In their cases the competence and performance of both men were unquestioned: the issue seems to be the perception that they received "too much" and that there was inadequate disclosure. We provide, history, analysis and over three dozen recommendations for reforming the system surrounding executive compensation. Section I introduces a conceptual framework for analyzing remuneration and incentives in organizations. We then analyze the agency problems between managers and shareholders and between board members and shareholders, and discuss how well designed pay packages can mitigate the former while well designed corporate governance policies and processes can mitigate the latter. We say "mitigate" because no solutions will eliminate these agency problems completely. Since bad governance can easily lead to value destroying pay practices our discussion includes analyses of corporate governance as well as pay design. Because optimal remuneration policies cannot be designed and managed without consideration of the powerful relations and interactions between the financial markets and the firm, its top-level executives and the board, we devote significant space to these factors. Section II offers a brief history of executive remuneration from 1970 to the present. Section III examines and explains the forces behind the US-led escalation in share options. We argue that boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations and, as a result, too many options have been awarded to too many people. Section IV defines and discusses the agency costs of overvalued equity as the source of recent corporate scandals. Agency problems associated with overvalued equity are aggravated when managers have large holdings of stock or options. Because neither the market for corporate control or the usual incentive compensation systems can solve the agency problems of overvalued equity, they must be resolved by corporate governance systems. And few governance systems were strong enough to solve the problems. As the overvalued equity problem illustrates, while remuneration can be a solution to agency problems, it can also be a source of agency problems. Section V discusses several widespread problems with pay processes and practices, and suggests changes in both corporate governance and pay design to mitigate such problems: including problems with the appointment and pay-setting process, problems with equity-based pay plans, and problems with the design of traditional bonus plans. We show how traditional plans encourage managers to ignore the cost of capital, manage earnings in ways that destroy value, and take actions to deceive investors and capital markets. Section VI defines and analyzes a new concept: what we call the Strategic Value Accountability issue. This is the accountability for making the link between strategy formulation and choice and the value consequences of those choices - basically the link between internal managers and external capital markets. The critical importance of this accountability, its assignment, and its implications for performance measurement and remuneration have long been unrecognized and therefore ignored in most organizations. Section VII analyzes the complex relationships between managers, analysts, and the capital market, the incentives firms have to manage earnings to meet or beat analyst forecasts, and shows how managers playing the earnings-management game systematically erode the integrity of their organization and destroy organizational value. We highlight the puzzling equilibrium in this market that seems to suggest collusion between analysts and managers at the expense of investors - an area that is ripe for further research.