Corporate Honesty and Business Education: A Behavioral Model

Abstract

Since the mid-1970’s neoclassical economic theory has dominated business school thinking and teaching in dealing with the nature of human motivation. However valuable in understanding competitive product and financial markets, neoclassical economic theory employs an incorrect, Homo economicus, model of human behavior that treats managers as selfish maximizers of personal wealth and power. TheHomoeconomicusmodel implies that a firm’s board of directors can best further stockholders’interests by (a) selecting managerial personnel who are focussed virtually exclusively on personal financial gain, and (b) inducing them to act as agents of the stockholders by devising incentives that minimize the difference between the financial returns to stockholders and the firm’s leading managers. Moreover, while neoclassical financial theory, in the form of the efficient markets hypothesis, is a generally insightful portrayal of financial markets, this theory implies that a firm’s stock price is the best overall measure of the firm’s long-term value. This implies that managerial incentives should be tied to stock market performance, since this will best align the interests of managers and stockholders. However, this implication is invalid when managers can manipulating information flows that influence short term stock price movements. Neoclassical economic theory thus fosters a corporate culture that ignores the personal rewards and social responsibilities associated with managing a modern enterprise, and encourages an ethic of greedy materialism in which managers are expected to care only about personal financial reward, and in which such human character virtues as honesty and decency are honored only when they contribute to personal material reward. However, a wide range of experiments based on

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