Rewarding Outside Directors

Authors

Assaf Hamdani, Bar Ilan Faculty of Law
Reinier Kraakman, Harvard Law School

Abstract

While they often rely on the threat of penalties to produce deterrence, legal systems rarely use the promise of rewards. In this Article, we consider the use of rewards to motivate director vigilance. Measures to enhance director liability are commonly perceived to be too costly. We, however demonstrate that properly designed reward regimes could match the behavioral incentives offered by negligence-based liability regimes but with significantly lower costs. We further argue that the market itself cannot implement such a regime in the form of equity compensation for directors. We conclude by providing preliminary sketches of two alternative reward regimes. While this Article focuses on outside directors, the implications of our analysis extend to other gatekeepers as well.

Recommended Citation

Assaf Hamdani & Reinier Kraakman, Rewarding Outside Directors, 105 Mich. L. Rev. 1677 (2007).
Available at: https://repository.law.umich.edu/mlr/vol105/iss8/3