Misalignment: Corporate Risk-Taking and Public Duty

Steven L. Schwarcz*

This Article argues for a “public governance duty” to help manage excessive risk-taking by systemically important firms. Although governments worldwide, including the United States, have issued an array of regulations to attempt to curb that risk-taking by aligning managerial and investor interests, those regulations implicitly assume that investors would oppose excessively risky business ventures. That leaves a critical misalignment: because much of the harm from a systemically important firm’s failure would be externalized onto the public, including ordinary citizens impacted by an economic collapse, such a firm can engage in risk-taking ventures with
positive expected value to its investors but negative expected value to the public. The Article analyzes why corporate governance law should, and shows how it feasibly could, take the public interest into account.

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© 2016 Steven L. Schwarcz. Individuals and nonprofit institutions may reproduce and distribute copies of this Article in any format at or below cost, for educational purposes, so long as each copy identifies the author, provides a citation to the Notre Dame Law Review, and includes this provision in the copyright notice.

*Stanley A. Star Professor of Law & Business, Duke University School of Law; Founding Director, Duke Global Financial Markets Center; Senior Fellow, the Centre for International Governance Innovation. E-mail: schwarcz@law.duke.edu. For valuable comments, I thank Emilios Avgouleas, John de Figueiredo, Deborah DeMott, Lisa M. Fairfax, Jesse D. Gossett, Matthias Haentjens, John Hasnas, Edward Kane, Ian B. Lee, Robert T. Miller, Marc T. Moore, Peter O. Muelbert, Zhong Xing Tan, Gabe Shawn Varges, Charles Whitehead, and participants in the 2015 Distinguished Public Lecture in Corporate Governance at the University of Florence, in the 2016 Financial Regulation Roundtable at Columbia University, and in faculty workshops at the University of Iowa College of Law, the University of Zurich Institute of Law (co-sponsored by the University of Zurich Centre for Financial Regulation), and (jointly via virtual connection) Duke University School of Law and Shanghai University of International Business and Economics (SUIBE) School of Law. I also thank Brittany LaFleur, Tashi Sun, and Ruiyao Sun for invaluable research assistance. Support is provided in part by a Fuller-Purdue grant.