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Vol. 105 (May 2020)

Harnessing Law and Economics to Disincentivize Corporate Misbehavior

Zachary Henderson, Law Clerk, Seventh Circuit Court of Appeals

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10 May 2020

Top-level executive compensation has increased by over 1000% over the past four decades and is now primarily based on a corporation’s market performance. The size and number of corporations is also at an all-time high, and corporate misbehavior has never been so profitable for the small handful of executives at the helms of the world’s largest and arguably most important commercial entities. Yet at the same time, tracking down corporate misbehavior has become increasingly difficult—and much of what the majority of people would call misbehavior is not at the end of the day punishable. This Essay takes the position, as have a number of prominent researchers and professors of corporate law, that executive compensation is currently in a bubble driven by absentee shareholders, captured boards, and often corrupt executives. This Essay analogizes to the law and economics concept of the least-cost avoider in order to explain why accountability for profitable misconduct has been displaced from the C-Suite to an increasingly absentee pool of shareholders that cannot be reached effectively by the legal system without disrupting the limited liability regime so important to our modern investment economy. This Essay advocates taking steps to shift the analogical least-cost avoider back to the C-Suite where it belongs.

To accomplish this, this Essay proposes that Congress harness the compensation bubble and its attendant increased incentive for qualified persons to seek and accept executive-level positions: it recommends passing legislation increasing the criminal exposure of executives by making them criminally liable for a broader array of misbehavior. Most critically, this Essay advocates modifying the degree of mens rea required for criminal liability. This Essay concludes by presenting a model statute for the reader’s consideration.

To read more, click here: Harnessing Law and Economics to Disincentivize Corporate Misbehavior