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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.

Library of Congress Subject Headings

Financial crises, Liability (Law), Risk management, Corporate governance--Law and legislation