ABSTRACT
Having examined conceptual arguments and empirical evidence demonstrating that the interests of equity investors in financial institutions and of the public are diverging with regard to risk-taking, this chapter seeks to identify the corporate law doctrines that make this possible. The need for corporate law and corporate governance to devise mechanisms to protect and empower the shareholders vis-a-vis the directors and managers is grounded on agency theory. It is widely acknowledged that in order for businesses to make profits they need to take risks, as business activity necessarily entails making decisions with limited information. Prima facie, corporate directors and senior managers have no direct reason to satisfy the risk appetite of the shareholders, as in widely held companies they enjoy in practice a very wide discretion to manage companies as they think fit, as they are freed from any shareholder interference other than in extraordinary circumstances.
