The Irrational Actor in the CEO Suite: Implications for Corporate Governance

Abstract

This Article challenges corporate governance theorists’ standard assumptions regarding the rationality of business leaders. It reviews scholarly research that documents the presence of irrational actors among senior corporate managers and considers the impact these executives might have on corporations and society. The Article focuses analysis on psychological literature that explores why risk-related decision-making often goes wrong.

Research shows that many individuals have a dysfunctional approach to risk that leads them to engage in self-destructive conduct. A non-trivial number of individuals with problematic personality traits work at high levels of major corporations where they have the capacity to cause significant harm. This reality poses challenges for policy prescriptions based on the rational actor theory – the idea that laws should be designed to harness an individual’s propensity to act in his rational self-interest.

One potential danger is that policies that promote the pursuit of self-interest have the unintended effect of attracting individuals with antisocial traits to join the corporate workforce. Another concern is that policies that emphasize self-interest may exacerbate antisocial tendencies among corporate employees, leading to increasingly risky and unethical corporate conduct. The Article weighs these possibilities and offers recommendations for reform.