What Do Corporate Directors Maximize? (Not Quite What Everybody Thinks)

11 Pages Posted: 19 Nov 2009

See all articles by Amitai Aviram

Amitai Aviram

University of Illinois College of Law


The agency problem at the core of corporate law stems from a chronic potential conflict of interest between directors’ self-interest and that of shareholders. Corporate law views directors’ self-interest in terms of diverting welfare to directors at the expense of shareholders. Another component of directors’ self-interest – being perceived as maximizing shareholders’ welfare – is seen not as part of the agency problem but as part of the solution (aligning directors’ incentives with shareholders’).

This is true only if taking actions that maximize shareholders’ welfare is also the optimal manner for a director to be perceived as maximizing welfare. However, directors have more appealing ways to be positively perceived. In conducting bias arbitrage, directors identify risks that shareholders over-estimate, take action to address the risk, and then take credit for the “lowered” risk (i.e., shareholders’ corrected assessment of the risk).

Bias arbitrage is more attractive as shareholders’ misperception of a risk increases. The opportunity to bias arbitrage thus leads directors to address highly-misperceived risks instead of highly-remediable risks.

Keywords: agency problem, corporate governance, conflict of interest, business judgment rule, bias arbitrage

JEL Classification: D23, G30, K22, L21, M14, P12

Suggested Citation

Aviram, Amitai, What Do Corporate Directors Maximize? (Not Quite What Everybody Thinks). Journal of Institutional Economics, Forthcoming , Illinois Public Law Research Paper No. 09-15 , U Illinois Law & Economics Research Paper No. LE09-032, Available at SSRN: https://ssrn.com/abstract=1508102

Amitai Aviram (Contact Author)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

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