Writing about the role that risk-taking by boards had in the run-up to the financial crisis, Vice Chancellor Leo Strine, Jr. of the Delaware Court of Chancery wrote an op-ed piece on the New York Times’ DealBook blog that some boards went along with investor demands to create profits.
Whatever the possible causes of the recent financial debacle, it seems clear that there is one cause that can be ruled out: that the directors and managers of the failed firms were unresponsive to investor demands to take measures to raise profits and increase stock prices.
Rather, to the extent that the crisis is related to the relationship between stockholders and boards, the real concern seems to be that boards were warmly receptive to investor calls for them to pursue high returns through activities involving great risk and high leverage. Indeed, the recent financial industry debacle is perhaps most surprising for its predictability in light of mundane realities accepted by social scientists of the center left and right.
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