Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis

Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis

Corporations, Globalisation and the Law series

Joan Loughrey

The financial crisis revealed failings at board level at many financial institutions. But despite calls for bank boards to be held to account, there has been a remarkable paucity of litigation against bank directors for breach of their duties to their institutions. This book assesses whether the law relating to directors’ duties and shareholder litigation has contributed to this, taking into account the changes to both that were introduced by the Companies Act 2006.

Chapter 2: The duty to promote the success of the company: is it fit for purpose in a post-financial crisis world?

Andrew Keay

Subjects: business and management, corporate social responsibility

Extract

It has been said that the underlying reason for the financial crisis of 2007–2009 and the problems connected to it, was the mispricing of risk,1 and/or the employment of foolish and irresponsible lending practices all the way down the finance chain.2 Some have focused on the failure to manage risk as the reason for the crisis.3 Others have identified a broader reason, namely the short-termist pressure placed on directors as a result of the demands of shareholders for unsustainable ever-increasing earnings growth that was possible only by way of the shortcut of overleverage and reduced investment, and the dangerous route of excessive risk. Such commentators have emphasised the fact that the stability and financial strength needed to endure economic cycles were sacrificed for immediate satisfaction.4 Some commentators have identified the complexity of the finance products employed as a key reason for the crisis.5 But many commentators have opined that failures in corporate governance in financial institutions caused the crisis,6 a view also taken by the UK’s Financial Services Authority (FSA),7 even though it has been shown that the governance of these companies is no worse than companies conducting businesses in other fields.8 Some might well argue that failures in risk management are themselves failures in corporate governance.9 It is perhaps notable that UBS, the Swiss-based financial services company, linked the two when it provided a frank assessment of its risk management and governance failures to its shareholders.

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