TY  - JOUR
AU  - Morck,Randall
TI  - Behavioral Finance in Corporate Governance - Independent Directors, Non-Executive Chairs, and the Importance of the Devil’s Advocate
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10644
PY  - 2004
Y2  - July 2004
UR  - http://www.nber.org/papers/w10644
L1  - http://www.nber.org/papers/w10644.pdf
N1  - Author contact info:
Randall Morck
Faculty of Business
University of Alberta
Edmonton, AB  T6G 2R6
CANADA
Tel: 780/492-5683
Fax: 780/492-3325
E-Mail: randall.morck@ualberta.ca
AB  - The Common Law, parliamentary democracy, and academia all institutionalize dissent to check undue obedience to authority; and corporate governance reformers advocate the same in boardrooms. Many corporate governance disasters could often be averted if directors asked hard questions, demanded clear answers, and blew whistles. Work by Milgram suggests humans have an innate predisposition to obey authority. This excessive subservience of agent to principal, here dubbed a "type II agency problem", explains directors’ eerie submission. Rational explanations are reviewed, but behavioral explanations appear more complete. Experimental work shows this predisposition disrupted by dissenting peers, conflicting authorities, and distant authorities. Thus, independent directors, chairs, and committees excluding CEOs might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant – perhaps reflecting problems identifying genuinely independent directors.
ER  -