Systemic Harms and Shareholder Value
University of Oxford - Faculty of Law; University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)
Jeffrey N. Gordon
Columbia Law School; European Corporate Governance Institute (ECGI)
July 11, 2014
The Journal of Legal Analysis, Forthcoming
ECGI - Law Working Paper No. 222
Columbia Law and Economics Working Paper No. 452
The financial crisis has demonstrated serious flaws in the corporate governance of systemically important financial firms. In particular, the Shareholder Value norm, which has guided corporate governance reform for a generation, proves to be a faulty guide for managerial action in systemically important firms. This is not only because the failure of such firms will have spillovers that defy the cost-internalization of the tort system but also because these spillovers will harm their own majoritarian shareholders. The interests of diversified shareholders fundamentally diverge from the interests of managers and other controllers because the failure of a systemically important financial firm will produce losses throughout a diversified portfolio, not just own-firm losses. Among the consequences: the business judgment rule protection that makes sense for officers and directors of a non-financial firm leads to excessive risk-taking in a systemically important financial firm. To encourage appropriate modification of the Shareholder Value norm, we propose officer and director liability rules as a complement (and substitute) to the prescriptive rules that have emerged from the financial crisis.
Number of Pages in PDF File: 46
Keywords: Corporate Governance, Financial Crisis, Financial Institutions, Director Liability
JEL Classification: G21, G23, G28, G34, K22Accepted Paper Series
Date posted: August 9, 2013 ; Last revised: July 17, 2014
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