Coase-Sandor Working Paper Series in Law and Economics

Document Type

Working Paper

Publication Date

2021

Abstract

The COVID-19 crisis has demonstrated that Americans rely on certain for-profit corporations to supply the essentials of everyday life. Even though the government had assumed extraordinary responsibilities for the wellbeing of its citizens for the duration of the crisis, for-profit companies were deemed so essential to social functioning that workers were sent to keep them running despite the risk of infection with a deadly disease. If our society’s capacity to meet basic needs in a crisis is entirely dependent on the capacity of private corporations, it is necessary to critically evaluate the performance of the directors and officers who lead these companies, and to ask whether their pre-crisis decisions were made within an appropriate framework of incentives. Recent experience suggests good reasons to question whether our existing system of corporate governance has proven equal to the outsized role of key corporations. Various corporations were not prepared to operate safely at appropriate levels during a crisis, creating enormous economic and public health risks. These issues were at least plausibly caused by an over-emphasis on short-term profit maximization within a specific pre-crisis operating environment, and a failure to address the undiversifiable risks associated with a potential disruption. While external regulation and coordination by the government is a critical part of the solution to this problem, new corporate governance tools could play a valuable role in ensuring that directors and officers recognize and carry out a duty to build resilient organizations. This Article discusses one possible tool: a focused liability regime that would hold the directors and officers of corporations running essential businesses liable if they fail to prepare for crises.


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