1. Behavioral Finance
Economics 437

2. Why There is a Problem? Shareholder is the principal
Management is the agent
Shareholders’ (economic) interests my be dramatically different that the (economic) interests of management
Acquisitions for “growth” or “diversification”
Berger and Olef 1995
Executive compensation

3. Possible Solutions Term limit for outside directors Pay
One Term – cannot be re-elected
Term could be 8, 10, 12 years
Pay
Deferred stock
Received only two years after director leaves the board
Emphasize “disclosure” not prohibitions

4. The End