Keynote Reflections: The Public Governance Duty

Abstract

Firms must take ever greater risks to try to innovate and create value in our increasingly competitive and complex global economy. Corporate governance law generally delegates control over excessive risk-taking to the firm’s investors, principally its risk-seeking shareholders. But this does not cover the type of risk-taking that led to the global financial crisis and that is becoming ever more common – risk-taking that could have systemic consequences to the financial system. I argue for a “public governance duty,” requiring managers of systemically important firms to assess the impact of risk-taking on the public as well as on investors, and to balance the costs and benefits using a precautionary principle to protect the public. I also analyze the extent to which managers performing this public governance duty should be protected by a business judgment rule.