Principals vs . Principles : What Do Managers Do When Governance Is Slack ? ∗

The separation of ownership and control in corporations opens up the potential for moral hazard. Thus it is conventional wisdom that managers who are not closely monitored pursue personal goals rather than maximize shareholder wealth. Yet little is known about what these goals are, despite the importance of understanding manager behavior when designing corporate governance rules. This paper provides new insights into managers’ personal preferences by studying the variations in corporate environmental and social performance associated with different corporate governance provisions. I employ a unique dataset on corporate governance and corporate social responsibility and exploit variations in takeover defenses to analyze differences in managers’ behavior. I find that with weaker governance, more resources are allocated into environmentally and socially responsible objectives and away from core responsibilities. These findings support a theory that ethical principles are important for the subjective well-being of managers.