Because prudent corporate governance often requires managers to take risks based on statistically expected outcomes, corporate failures that have a small but finite chance of occurring cannot always be prevented. This Article makes three related claims about risk-taking in corporate governance.

This Article’s first claim is that managers should not automatically be presumed to be at fault for corporate failures that result from risk-taking decisions based on statistical methodologies that reasonably justify the decisions ex ante. Conceptually, the business judgment rule should protect corporate managers for engaging in a reasonable decision-making process, including one that is statistically based. Jurisdictionally, however, the scope of the business judgment rule is narrowly limited (primarily, to state-law shareholder derivative lawsuits), leaving a large protection gap.

To fill this gap, this Article’s second claim is that corporate managers should also be protected by a “statistics-based governance” rule that exempts them from liability, under both federal and state law, for making risk-taking decisions based

on statistical methodologies that reasonably justify their decision-making (assuming good faith, and no managerial conflicts of interest or fraud). Part of the rationale for this claim is that a statistics-based governance rule would be more objective, and thus less subject to criticism, than the business judgment rule.

The Article’s third claim concerns expected-value analysis, which is the statistical methodology most generally accepted and widely used for making risk-taking decisions. When determining an expected value, corporate managers should ask, “Expected value to whom?” For most risk-taking decisions, this determination should only take into account the firm and its investors. However, for decisions that could cause significant economic, environmental, or other social harm, this determination should also endeavor to take into account the public.

The paper: 

You can read the paper here.

About the speaker: 

        Steven L. Schwarcz is the Stanley A. Star Distinguished Professor of Law & Business at Duke University and Founding Director of Duke’s interdisciplinary Global Capital Markets Center (later renamed the Global Financial Markets Center). His areas of research and scholarship include insolvency and bankruptcy law, international finance, capital markets, systemic risk, corporate governance, and commercial law. (Links to his scholarship are at http://law.duke.edu/fac/schwarcz/.) He holds a bachelor’s degree in aerospace engineering (summa cum laude) and a Juris Doctor from Columbia Law School. Prior to joining the Duke faculty, he was a partner at two of the world’s leading law firms and Visiting Lecturer at Yale Law School. He also helped to pioneer the field of asset securitization, and his book, Structured Finance, A Guide to the Principles of Asset Securitization (3d edition), is one of the most widely used texts in the field.

        Professor Schwarcz has also been the Leverhulme Visiting Professor at the University of Oxford, Visiting Professor at the University of Geneva Faculty of Law, Lecturer in Law at Columbia Law School, Senior Fellow at The University of Melbourne Law School, Visiting Fellow at Ludwig-Maximilians-Universitat Munchen (LMU) Center for Advanced Studies, Guest Professor at Shanghai University of International Business and Economics, Distinguished Visiting Professor at University College London (UCL) Faculty of Laws, Distinguished Honorary Professor, University of Durham Law School, the MacCormick Fellow at The University of Edinburgh School of Law, the Liberty Fellow at the University of Leeds School of Law (scheduled for May-June 2020), and an adviser to the United Nations. He has given numerous endowed or distinguished public lectures, including at The University of Hong Kong, the University of Oxford (the Leverhulme Lectures 2010, available at http://www.law.ox.ac.uk/published/leverhulme2010.php), Georgetown University Law Center, National University of Singapore, University of Florence, Leiden University, Radboud University Nijmegen, Trinity College Dublin School of Law, and The National Assembly of the Republic of Korea. He has served as an expert at meetings of the World Economic Forum. He also has given numerous keynote speeches, including at annual conferences of the European Central Bank, the Corporate Law Teachers Association of Australia, New Zealand, and Asia-Pacific, the National Business Law Scholars Conference (at The University of Chicago Law School), Moody’s Corporation, and the Asian Securitisation Forum.

        Additionally, Professor Schwarcz has testified before the U.S. Congress on topics including systemic risk, securitization, credit rating agencies, and financial regulation and has advised several U.S. and foreign governmental agencies on the financial crisis and shadow banking. His writings include Systemic Risk, 97 Georgetown Law Journal 193, the second most cited law review article of 2008; he also has been recognized as the world’s second most cited scholar, 2010-2014 and again 2013-2017, in commercial, contract, and bankruptcy law. He is also a Fellow of the American College of Bankruptcy, a Founding Member of the International Insolvency Institute, a Fellow of the American College of Commercial Finance Lawyers, Business Law Advisor to the American Bar Association Section on Business Law, a member of P.R.I.M.E. Finance’s Panel of Recognized International Market Experts in Finance, and Senior Fellow of The Centre for International Governance Innovation (CIGI).