Document Type
Article
Publication Date
2014
DOI
https://doi.org/10.1093/jla/lau004
Abstract
The financial crisis has demonstrated serious flaws in the corporate governance of systemically important financial firms. In particular, the norm that managers should seek to maximize shareholder value, as measured by the stock price, 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 incentives, we propose officer and director liability rules as a complement to (and substitute for) the prescriptive rules that have emerged from the financial crisis.
Disciplines
Business Organizations Law | Law
Center/Program
Ira M. Millstein Center for Global Markets and Corporate Ownership
Recommended Citation
John Armour & Jeffrey N. Gordon,
Systemic Harms and Shareholder Value,
6
J. Legal Anal.
35
(2014).
Available at:
https://scholarship.law.columbia.edu/faculty_scholarship/2911
Comments
Originally published in the Journal of Legal Analysis, Oxford University Press.