Abstract

http://ssrn.com/abstract=2308007
 


 



The Duty to Manage Risk


Christine Hurt


J. Reuben Clark School of Law, Brigham Young University

August 3, 2013

Illinois Program in Law, Behavior and Social Science Paper No. LBSS14-09

Abstract:     
Shareholders, consumers, homeowners, borrowers, employees and other citizens were harmed, in some cases substantially, by the business practices of individuals at various financial firms leading up to the 2008 financial crisis. Unlike after other crises in the financial markets, such as the 2001 accounting fraud scandals, the public was not treated to the catharsis of criminal prosecutions or even large civil judgments and settlements. Instead, financial firms that incurred large losses on behalf of its shareholders repeatedly withstood attempts at legal redress in the courts by those shareholders. Shareholders were turned away from the courthouse door in cases involving federal securities law claims and claims of breaches of state law fiduciary duties. Scholars and commentators have focused on one area of fiduciary duty that seemed to fit: a claim that the board of directors of a firm failed to exercise its oversight duty to monitor firm-wide financial risk. However, this claim was also unsuccessful in the courts as judges viewed the duty to monitor risk as repackaging of the duty of care, which is significantly shielded from judicial review. Therefore, shareholders were left without a cause of action for admittedly “boneheaded” decisions of managers in light of changing economic circumstances.

This Article argues that the failure of the short life of the duty to monitor risk is not a bad development, but a logical and reasoned one. To say that shareholders, and by extension, courts, should not second-guess business decisions of boards of directors that are the result of a rational process, but to say that shareholders can second-guess the supervision of boards of those same decisions is inconsistent with decades of corporate governance jurisprudence. To make room for this duty within the duty of oversight or to create a separate duty to monitor financial risk would have the consequence of opening a side door to the questioning of all kinds of legal business decisions that have within them an element of business risk, political risk, currency risk, environmental risk, and legal risk. Though the oversight duty had before been cabined to holding directors responsible for the crimes and wrongful acts they should have known were being perpetuated by firm employees, the duty to monitor risk would subject legal but risky actions to judicial scrutiny. This eventuality would in effect reduce the business judgment rule to a nullity.

Number of Pages in PDF File: 47

Keywords: fiduciary duty, duty of loyalty, financial crisis, shareholder, corporation, derivative lawsuit, duty of care, securities fraud

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Date posted: August 10, 2013  

Suggested Citation

Hurt, Christine, The Duty to Manage Risk (August 3, 2013). Illinois Program in Law, Behavior and Social Science Paper No. LBSS14-09. Available at SSRN: http://ssrn.com/abstract=2308007 or http://dx.doi.org/10.2139/ssrn.2308007

Contact Information

Christine Hurt (Contact Author)
J. Reuben Clark School of Law, Brigham Young University ( email )
430 JRCB
Brigham Young University
Provo, UT 84602
United States
80144225354 (Phone)
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