Behavioral Ethics Meets Corporate Governance: Paradigm Shift?


Behavioral Ethics Meets Corporate Governance: Paradigm Shift?

September 1, 2020 – June 30, 2021


Adi Libson (Bar-Ilan University)


Over the last few years, there has been a growing academic interest in the field of behavioral ethics: people’s ethical biases in decision making. This scholarship has focused on the behavioral mechanisms that explain why ordinary unethicality is so common among people who view themselves as law-abiding individuals.

A recently published book by Professor Yuval Feldman (2008) systematically explored the far-reaching implications of this literature to the legal field: Instead of assuming that its primary target are "bad people" which the law must deter from maximizing their own self-interest, the law should aim to address "good people." These changes require a better understanding of the mechanisms which cause good people to do wrong. Better understanding will also lead to better ways of addressing this problem, by designing the situation in ways which would reduce people’s unethicality, such as verifying they have fewer justifications to behave unethically or ensuring they have a clear view of who are they harming.

The proposed research is aimed at examining the interaction of the behavioral ethics literature with the legal field which provides the most fertile ground for its acceptance: corporate law and governance. The corporate context serves as a 'perfect storm' combining and exacerbating several aspects emphasized in the behavioral ethics literature that lead individuals to act wrongly, such as doing things for the benefit of others, diffusion of responsibility, remoteness of the victim and contagiousness.

Furthermore, addressing the issue of conflict-of-interests and agency problems is central to the field of corporate law. As such, the understanding that a central way for curbing conflicts-of-interest is by increasing the saliency of the conflict-of-interest in the eyes of the agent may have far-reaching implications in the realm of corporate law and completely alter the arsenal of its tools. In many instances, such an analysis may reach opposite conclusions to that of the conventional law and economics framework on the effectiveness of certain instruments in curbing conflict-of-interest problems. Are independent directors an effective tool for monitoring conflicts-of-interests? How significant should be the role of fiduciary duties in dealing with the agency problem? What effects does the group dynamics of boards have on the monitoring of conflict-of-interests? Two types of implications of behavioral ethics on corporate governance will be examined: structural implications and procedural implications.

The central goal of the group is to facilitate a reciprocal engagement: examining the possible contribution of behavioral ethics to the corporate governance literature and the contribution of corporate governance to the organizational psychology literature. Behavioral ethics has many potential implications for corporate governance and can yield various feasible policy applications. Legal corporate scholars can also contribute to behavioral ethics scholars, by providing real-world contexts and suggesting additional experiments which can validate experimental findings in the field of behavioral ethics. This is an important contribution to the behavioral ethics literature, which faces a serious challenge concerning the extent of its external validity.