Systemic Harms and Shareholder Value

51 Pages Posted: 9 Aug 2013 Last revised: 4 Oct 2014

See all articles by John Armour

John Armour

University of Oxford - Faculty of Law; European Corporate Governance Institute (ECGI)

Jeffrey N. Gordon

Columbia Law School; European Corporate Governance Institute (ECGI)

Date Written: July 11, 2014


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.

Keywords: Corporate Governance, Financial Crisis, Financial Institutions, Director Liability

JEL Classification: G21, G23, G28, G34, K22

Suggested Citation

Armour, John and Gordon, Jeffrey N., Systemic Harms and Shareholder Value (July 11, 2014). The Journal of Legal Analysis, Volume 6, Issue 1, October, 2014, ECGI - Law Working Paper No. 222, Columbia Law and Economics Working Paper No. 452, Available at SSRN:

John Armour

University of Oxford - Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom
+44 1865 281616 (Phone)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels


Jeffrey N. Gordon (Contact Author)

Columbia Law School ( email )

435 West 116th Street
Ctr. for Law and Economic Studies
New York, NY 10027
United States
212-854-2316 (Phone)
212-854-7946 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels


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