Behaviour and rationality in corporate governance

The agency view of corporate governance requires effective monitors and gatekeepers to align the interests of the agent with those of the principal. One common denominator in recent corporate debacles appears to be the collective failure of gatekeepers and monitors. This paper suggests that conventional proposals to reform corporate governance through legislation, codes of best practice, and the like, are necessary, but underestimate the pressures from conflicts of interest and bias which reputation intermediaries face in their interaction with colleagues and clients. The aim of this paper is to integrate various strands of the literature on corporate governance, cognitive research and behavioural economics to shed light on questions regarding the independence of boards of directors and external auditors.