Trust : The Unwritten Contract In Corporate Governance

Corporate governance systems exist to discourage self-interested behavior. One question that is often overlooked is how extensive these systems should be. A look at corporate governance today suggests that self-interest is high because companies are compelled - by regulators and the market - to adopt a long list of contracts, controls, and procedures to restrict employee behavior.However, the research literature suggests that companies might benefit if they enacted fewer, rather than more, controls. Companies that successfully foster high levels of trust between employees and monitors benefit from lower bureaucracy, simpler procedures, and higher productivity. We examine this issues in greater detail, and ask:• Would shareholders be better off if companies devoted greater effort to fostering trust?• Can trust be fostered in all settings?• Are some industries more likely to attract individuals that put their own interests first?• How can executives develop a culture that discourages self interest and encourages trust?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book "Corporate Governance Matters", and "A Real Look at Real World Corporate Governance."