Finance Series
Profitable Misconduct, Corporate Governance, and Law Enforcement
Working Paper Author/Authors
Stanford University
Nathan Atkinson
University of Wisconsin
Paul Pfleiderer
Stanford University
Key Finding
Relying on inducements for cooperation with corporations when enforcement is weak might appear beneficial but may make matters worse
Abstract
This paper analyzes interactions between corporate governance and law enforcement practices, focusing on cases where deterrence is weak and harmful misconduct is profitable. We show that managerial compensation contracts often undermine enforcement efforts aimed both at the corporation and at managers, and that common enforcement policies such as discounting penalties when corporations self-report or implement compliance programs can lead to more social harm by increasing the profitability of misconduct. Our results suggest that policies designed to deter corporate misconduct must account for interactions between external governance, including laws and their enforcement, and internal governance mechanisms such as managerial compensation.
