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Complexity and Crisis in the Financial System

Complexity and Crisis in the Financial System

Critical Perspectives on the Evolution of American and British Banking

Edited by Matthew Hollow, Folarin Akinbami and Ranald Michie

With contributions from across the disciplines of law, history, finance, and economics, Complexity and Crisis in the Financial System offers a truly interdisciplinary study of the relationship(s) between crises and complexity in the US and UK financial markets. Taken together, the contributions in this volume not only challenge many often taken-for-granted ideas about the nature of financial crises, but also broaden our understanding of the long-term causes (and consequences) of the global financial crisis of 2007–2008.

Chapter 5: From tort to finance: Delaware’s sedative duty to monitor

Dalia Tsuk Mitchell

Subjects: business and management, critical management studies, strategic management, economics and finance, economic psychology, financial economics and regulation

Abstract

This chapter explores the erosion of the directors’ duty to monitor in twentieth-century US corporate law. Focusing on several key cases, I examine how in the course of the last century courts brought different ideas about the allocation of risk within the corporate enterprise to bear upon their analyses of the duty to monitor (and the duty of care, more broadly). In the late nineteenth century, as corporate law focused on protecting the corporate entity and all of its constituencies, the directors’ duty of care was grounded in torts. By the late twentieth century, as corporate law became fixated on the maximization of profit, courts relied on modern finance theory to hold that investors could fend for themselves. As this chapter further elaborates, courts used the rhetoric of torts and finance to assure investors that they could trust their corporate managers, while shielding the latter from liability for the financial consequences of their actions and inactions. By skilfully describing directors’ duties while never finding directors and executives to have breached them, the courts conveyed a consistent message to investors about the competency and diligence of corporate management. With detailed analyses of the role of the board, the appropriate standard to evaluate their duties, and the theories that grounded corporate law, the courts helped legitimate the development of powerful publicly held corporations and the unquestionable reign of their managers.

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