Integrity, unprincipled agents and corporate governance reform

This study investigates the implications of integrity-interpreted as the alignment of one's words and deeds-within the agency paradigm by explicitly allowing for unprincipled behavior (agent misconduct) in addition to conflicts of interest resulting from the separation of ownership and control. Under adverse selection, contracts that screen for agents who exhibit integrity characterize a previously unidentified symbiosis between the penalty for unprincipled behavior and high-powered incentive pay. The resulting contracts and penalties are interpreted in light of the Sarbanes-Oxley and Dodd-Frank Acts.