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The Bonding Effects of Directors’ Statutory Wage Liability: An Interactive Corporate Governance Explanation
Author(s) -
Davis Ronald B.
Publication year - 2002
Publication title -
law and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.534
H-Index - 45
eISSN - 1467-9930
pISSN - 0265-8240
DOI - 10.1111/j.0265-8240.2002.00162.x
Subject(s) - corporate governance , corporation , liability , business , accounting , wage , statutory law , agency cost , value (mathematics) , corporate law , enterprise value , agency (philosophy) , limited liability partnership , finance , economics , legal liability , labour economics , law , shareholder , philosophy , epistemology , machine learning , political science , computer science
Canadian corporate directors are personally liable to the corporation's employees for unpaid wages. The dominant rationale is the protection of vulnerable employees. A proposal under consideration to exonerate directors from this liability responds to claims that directors of financially troubled corporations resign prematurely, lessening the realized value potential of the firm. Scholars have also argued that a “liability chill” causes directors to make inefficient, risk‐averse investment decisions while the corporation is solvent. Paradoxically, exoneration may actually decrease the value of the firm because directors’ liability for employees’ wages increases efficiency in corporate governance by reducing agency costs. It serves as a bond by directors to corporate stakeholders that they will diligently restrain harmful managerial behavior.