The unwritten contract in corporate governance

Companies that demonstrate trust in their employees and managers can find unexpected benefits along the way.

 

Corporate governance systems exist to discourage self-interested behaviour. Although shareholders would like organisational participants—employees, managers, executives and directors – to work toward a shared goal of increasing corporate value, in reality each has individual interests that influence how they make decisions on a day-to-day basis. To economists, this is fundamentally an incentive problem: the incentive to work for one’s own benefit is stronger than the incentive to work for the firm’s benefit. The solution is to create a system – through contracts, controls and procedures – that corrects this imbalance by aligning the interests of insiders with those of shareholders and encouraging insiders to take actions that benefit the organisation as a whole and not just themselves.

David F. Larcker

Professor David F. Larcker Larcker is the director of the Corporate Governance Research Initiative at the Stanford Graduate School of Business and senior faculty of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University. Professor Larcker was previously the Ernst & Young professor of accounting at the Wharton School of the University of Pennsylvania and professor of accounting and information systems at the Kellogg Graduate School of Management at Northwestern University.

Brian Tayan

Brian Tayan is a researcher at the Corporate Governance Research Initiative at Stanford Graduate School of Business. He has co-authored two books, Corporate Governance Matters and A Real Look at Real World Corporate Governance, in collaboration with Professor David F. Larcker. Previously, Brian has worked as a financial analyst in the Office of the CFO at Stanford University and as an investment associate at UBS Private Wealth Management in San Francisco.