Corporate Governance and Financial Crisis in the Long Run

Prior to the global financial crisis which began in 2007, corporate governance reforms of the preceding thirty years had promoted a shareholder-value based model of management for which there was little historical precedent. The underlying legal model of the firm retained a vestigial sense of the corporate form as a mechanism for promoting group cooperation, but it became increasingly ill suited to achieving this end in a period of hyper-liquidity in capital and credit markets. The destabilizing effects of the shareholder value norm included growing income inequality for which asset price inflation in the Anglo-American economies served as partial compensation, thereby helping to create the conditions which led to the global financial crisis. The failure of individual financial institutions cannot plausibly be ascribed to poor governance practices in those firms; there were more immediate factors at play, including ineffective regulation. However, the general trend towards shareholder value since the 1980s was implicated in a wider, systemic failure of the corporate governance system, of which the banking crisis was simply the most visible manifestation. Under these circumstances, a reassessment of the shareholder value based approach to the governance and management of large corporations is urgently required.