Corporate Scandals of the 21st Century: Limitations of Mainstream Corporate Governance Literature and the Need for a New Behavioral Approach

Abstract

I provide a critique of mainstream corporate governance literature based on agency theory as a conceptual solution in order to ensure de facto well governed companies worldwide. This critique is based on an analysis of common causes associated with high profile corporate scandals from the 21st century as well as on the limitations associated with the homo economicus premise underlying agency theory. As a result, I argue that a new behavioral approach to corporate governance shall emerge in order to reduce the frequency of corporate scandals in the future. This new view should be based on three main building blocks: 1) the systematic focus on the mitigation of cognitive biases in managerial decisions; 2) the continuous fostering of employee and executive awareness in order to promote unselfish long-term oriented cooperative behaviors; and, 3) the reduction of the likelihood of frauds through new corporate strategies developed based on a deeper understanding of its psychological motivations. By combining the traditional approach to corporate governance based on incentive and controls with a new behavioral approach focusing on the human factor, stakeholders may expect to end up with truly well-governed companies.