Entrenched Managers & Corporate Social Responsibility

Forthcoming, Penn State Law Review (Summer 2006).


A growing number of academics have suggested U.S. corporate governance laws bestow too much power on managers. Much of the research focuses on the relationship between corporate governance arrangements, which supply a means to managerial power, and the financial performance of corporations. This exclusive focus on financial performance may be misguided. Although profits serve as a proxy for the benefits corporations provide society, they do not always adequately reflect the costs of the activities that generated them. In this sense, financial performance may not give an accurate, or at least complete, picture of the real value of corporations. Whether managers are too entrenched by the laws of corporate governance, therefore, depends not only on their profitability but also on how they spend their discretion. Importantly, entrenched managers could use their discretion to sacrifice profits in the public interest. Building on prior research, this Article compares six entrenching governance provisions with the appearance of corporations on two investment indexes based on “social responsibility,” a measurement of performance along environmental, social and alternative economic factors. The results confirm a social psychological hypothesis of the Article: entrenchment–as measured by the presence of these six provisions–was negatively, and significantly, related to inclusion in the indexes. Although I offer competing explanations in addition to the hypothesis, the results tentatively support the conclusion that certain corporate governance arrangements entrench managers too much, leading to both poor financial and “social” performance.


Business Organizations Law | Economics | Law and Economics | Law and Society | Securities Law

Date of this Version

March 2006