Behavioral effects of corporate governance reforms and their legal implications

Abstract

Empirical research provides important insights into legal questions within the realm of corporate governance law. My first research project serves as an example of empirical research informing policy choices. My second study illustrates how empirical studies can explore potential adverse effects of a given legal solution on the interests protected by the fundamental rights. In both projects, I employed laboratory experiments - an empirical method that allows examining behavioral effects of corporate governance reforms.<br /> In 2011 the Reflection Group on the Future of EU Company Law recommended the EU legislator to introduce a Directive which would allow all public companies to appoint executive directors for different terms (one-year or multiple-year terms not exceeding 4-6 years) and choose between dismissal at-will and for good cause. This was intended to improve directors’ decision-making. The exact impact of appointment terms and dismissal procedures on directors’ performance is, however, an empirical question. In particular, it is unclear how directors will perform if the legislator provides the companies with a menu of options instead of imposing one particular solution. <br /> This inspired my first research project in which I investigated how seemingly equivalent appointment and dismissal rules influence individual behavior in a principal-agent relation. I observed that at-will contracts in contrast to fixed-term contracts foster successful relation. The effect is particularly pronounced when both contract types are available. It suggests that it is important to consider the impact of different legal solutions not only in isolation but also as endogenously chosen from possible available options. On a more general level, the results of my research and other empirical studies suggest that it is not only compensation schemes but also the length of appointment and dismissal rules which might potentially influence the decision-making of executive directors.<br /> Recent reforms introducing mandatory gender quotas for corporate boards motivated my second experimental study. Both – the German legislator and the EU Commission – claimed that a mandatory quota will not only increase the share of women on corporate boards but also improve corporate and board functioning. <br /> In my experimental research, I investigated whether mandatory quotas indeed might improve board performance. In particular, I studied whether a quota rule influences one particular aspect of group behavior (i.e. group cooperation) which might be important for functioning of a board of directors. I showed that the quota-based promotion compared to the performance-based promotion negatively affects group cooperation. I concluded that for evaluating the consequences of a legal intervention, it is crucial to examine the direct impact of the intervention itself rather than of the desired outcome of the intervention (i.e. gender diversity) on group behavior.<br /> The experimental method, despite some of its limitations, allowed me to investigate and compare basic behavioral reactions to different legal settings in a controlled environment. In particular, unlike other empirical methods, it enables me to draw conclusions on the causal relationship between a specific legal intervention and the observed behavior. With my research, I showed how experimental results might inform legally motivated questions originating in recent corporate governance reforms.