This document discusses how limited shareholder liability and shareholder empowerment have consolidated ownership and control, bolstering risky investment. It argues that the development of limited liability in US corporate law, coupled with deregulation and the emergence of shareholder activism, blurred the lines between ownership and control. This allowed shareholders to undertake risky initiatives to increase short-term profits while being shielded from liability. Corporate governance mechanisms were introduced to increase shareholder oversight of executives but also empowered shareholders. These trends consolidated shareholder power and incentivized riskier investments, focusing corporations solely on shareholder value maximization.

1. 1
THE POWER OF LIMITED SHAREHOLDER
LIABILITY:
______________________________
HOW SHAREHOLDER EMPOWERMENT
CONSOLIDATED OWNERSHIP
AND CONTROL
TO BOLSTER RISKY INVESTMENT
AUTHOR: MICHAEL LIS
MENTOR: ERDEMOGLU, E
2015-2016

2. 2
Table of Contents
Introduction……………………………………………………………………………………...3
1. Chapter 1 – Limited Liability & the Corporate Form…………………………………...5
I. 1.1 Limited Shareholder Liability………………………………………………………5
II. 1.2 Corporate Governance……………………………………………………………... 6
2. Chapter 2 – Shareholder Activism & the Consignment of Liability…………………… 8
I. 2.1 Shareholder Empowerment………………………………………………………....8
II. 2.2 Evolution of Shareholder Liability………………………………………………… 9
3. Chapter 3 – Breaking down the Barriers……………………………………………….12
I. 3.1 Deregulation and the Liberalization of the Market………………………………..12
II. 3.2 The Great Transfer of Power………………………………………………………13
4. Conclusion……………………………………………………………………………...15
5. Bibliography……………………………………………………………………………17

3. 3
_____________________Introduction____________________
Limited shareholder liability has not always been the standard practice. Prior to the paradigm
shift, the financial market protected itself from exploitation and unsound business practices by invoking
the use of double liability to maintain a system of checks and balances to prevent the financial system
from collapsing. Overtime, the doctrine of limited liability in US corporate law emerged to dominate the
scene and replaced the earlier 20th
century doctrine of risk aversion.
Coupled with a newly emerging paradigm shift, engendering shareholder empowerment and
activism as a mechanism of executive regulatory oversight, specific trends began to emerge which
manifested as an encroaching of the division of ownership and control. Without a clear division of
“ownership” and “control”, shareholders began undertaking risky initiatives to increase short-term profits
while shielding themselves from accountability behind the doctrine of limited liability. This movement
was endorsed throughout the Regan administration which fueled deregulation and the restructuring of
financial and non-financial firms to promote share price maximization and facilitate in new forms of
corporate organization and financing.
This author argues that the doctrine of limited liability in US corporate law, coupled with the new
paradigm shift in shareholder empowerment blurred the lines of distinction separating ownership and
control, resulting in unmitigated risky investment. This dramatic shift was preceded by a series of events
following the Golden era of America’s corporate boom in the wake of WW2. Corporate practices and
legislative intervention sought to restructure the financial sector in an attempt to bolster new investment
schemes meant to “revolutionize” the market. However, the impetus of financial reform inadvertently had
the effect of redistributing power to shareholders and facilitated in undercutting the hegemony of the
“Imperial CEO”.
The aim of this article is to provide an analysis of the regulatory trends and corporate practices
which developed following the Great Depression and how the transition from double liability to limited
liability schemes in the financial sector resulted in shareholders having an almost unlimited latitude in
promoting corporate initiatives meant to accrue short-term wealth generation.
The primary question addressed by the author is to what extent has the development of limited
liability coupled with deregulation of the financial market, and the emergence of the “shareholder

4. 4
movement” employed in corporate governance models, resulted in the promulgation of surreptitious
shareholder influence cultivating risky investment practices with impunity ascribed to the veil of limited
shareholder liability.
In order to answer this question, this article will provide a description of what is shareholder
limited liability and the purpose of its application within the law of corporations. This will be assessed in
light of the historical development of how unlimited liability and double liability schemes were replaced
by the doctrine of limited liability to facilitate in corporate growth. Thereafter, the introduction of
corporate governance mechanisms will be assessed in reference to shareholder empowerment and its
divergence from the Berle-Means 1932 paradigm of separation of ownership and control which resulted
in a system characterized by indirect shareholder participation in corporate management affairs.
The assessment of the shareholder value paradigm will also include a review of quasi financial
institutions, characterized by Financial Holding Companies, and how they provided an institutional
conduit for shareholders to exercise ownership and indirect control of executives through the use of strict
oversight mechanisms and performance standards. This explanation will elaborate on how the nexus
between limited shareholder liability, newly instituted corporate governance regimes and the emergence
of quasi-financial institutions gave shareholders the ability to practice banking in “corporate form” which
availed them to unlimited discretion to engage in risky investment practices while being protected by the
veil of limited liability.
The structure of this critical examination will be as follows: section 3 will address the definition
of limited shareholder liability and its purpose and commercial application; section 4 will address
corporate governance and the impact of its application within the commercial arena; section 5 will
address how the development of shareholder empowerment beginning in the late 20th
century diverged
from the Berle-Means 1932 paradigm of separation of shareholder ownership and managerial control;
section 6 will address how shareholder liability evolved in financial firms and how these new trends
triggered shareholders to take larger risks; section 7 will address how the influences of quasi-financial
firms precipitated risky shareholder investment practices; and section 8 will provide a conclusion.

5. 5
____________________Chapter One____________________
1. Limited Shareholder Liability
The purpose of limited liability is to shield shareholders from the debts of a corporation. The focal
concept expresses that persons (independent entities) are not personally liable for the obligations arising
out of the conduct of a business [corporation]1
. According to sec. 6.22 of the Model Business Act “a
shareholder cannot be held personally liable for the acts or debts of the corporation. He may however
become personally liable by reasons of his own acts or conduct”2
. This oration rests on premise of limited
liabilities two core aspects. Firstly, the association of capital and the partners of these associations
[corporations] are independent entities. Secondly, based on the principle of personalisation of debt, as
separate entities, each person is responsibly only for his own debt and is not affect personally from the
relationships between the corporation and its creditors3
.
The application of this doctrine in corporate law has its roots in the Convention Finance Theory
according to which, the basic corporate law principle of limited liability is to insulate shareholders from
the downside risks of corporate activity by allowing some portion of the corporation’s total risk exposure
to be externalized to creditors while the remainder is internalized by the corporation as its own separate
legal entity4
. Limited shareholder liability therefore operates as a buffer between the debt obligations of a
corporation whereby the liability of a shareholder is restricted to the nominal value of his shares5
–
precluding liability beyond that threshold6
.
The purpose and function of limited shareholder liability constitute a two-prong interdependent
mechanism of utility. As will be discussed in more depth in sec. 6, this mechanism7
allows shareholders
to compensate risk aversion by shielding themselves from debt obligations arising from business related
1
Limited Liability (1991), Uni. Kan. L. R. 39(4)
2
Model Business Corporation Act 2002 (2nd
edn) s. 6.22(b)
3
Wendy B.E. David & Serdar Hizir, Dance of Corporate Veils: Shareholder Liability in the United States of
American and in the Republic of Turkey [2008] Ankarabar REV 2008/2
4
Stephan M. Bainbridge, Corporate Governance after the Financial Crisis (1st
edn, Oxford Uni. Press 2002) 174
5
William P. Hackney, “Shareholder Liability for Inadequate Capital” [1982] U. Pitt. L. Rev. 43(4) 837
6
This is not to be mistakenly understood that the apportioned nominal value of shares represents a percentage of
debt obligation which must be met by the shareholders but rather that his exposure is limited to the amount invested
denoted by the nominal value of the shares purchased.
7
Referring back to the two core aspects of limited liability

6. 6
risk exposure. This in turns allows shareholders to capitalize on high-profile risky investments in order to
maximize corporate profit and increase corporate growth. This “yellow-brick road” approach is necessary
because as a firm’s residual claimants, shareholders are not entitled to returns on their investment until all
other claims on a corporation have been satisfied. All things being equal, shareholders therefore prefer
high return projects8
. This entails choosing riskier projects. Based on this two-prong mechanism, it
becomes apparent how limited shareholder liability drives corporate industrialization – higher risk yields
higher reward without have to internalize associated costs.
2. Corporate Governance
As the 20th
century drew to a close, shifting market conditions and financial deregulation cultivated a
corporate atmosphere where directors were granted unprecedented discretion in company management910
.
Corporate executives had become privy to greater managerial latitude which could in turn be exercised in
a manner prejudicial to the interests of shareholders11
. This asymmetrical relationship between corporate
executives and shareholders became a power struggle in increasingly need of oversight. Consequently, in
this corporate milieu, corporate governance provided the means by which to oversee and maintain checks
and balances on U.S. executives.
A willingness to engage in corporate governance began to proliferate following the rise of
shareholder activism in the late 1970’s through the late 80’s. This was engendered by increased lobbying
for the relaxation of rules that created obstacles to shareholder intervention in corporate affairs12
. The
lobbying effort was deeply rooted in the Berle-Means paradigm of the separation of ownership and
control in the modern corporation. The foregoing regulated the relationship between the principal
(shareholders) and agent (managers) by means of interdependent oversight so one body could not act
autonomously in disregard of the others – similar to the trias politica 3-tier structure of government.
However, due to the propagation of deregulation in the financial sector during the 20th
century,
instability in the business environment was induced due to a lack of governmental constraints. Managerial
8
Stephan M. Bainbridge, Corporate Governance after the Financial Crisis (1st
edn, Oxford Uni. Press 2002) 174
9
Possible explanation as to how shifting market conditions and deregulation of the financial sector gave
Directors increased autonomy and greater managerial latitude?
10
Brian Cheffins, “The Corporate Governance Movement, Banks and the Financial Crisis (2014) (Uni. Camb L. S.
Res Paper 56/2013)
11
Bengt Holmstrom, Steven N, Kaplan, “The State of U.S. Corporate Governance: What’s Right and What’s Wong?
(2005) J. APP. CORP. FIN vol 15(3)
12
Ibid, supra note at 9

7. 7
discretion was no longer tempered by any concrete regulatory framework. The Berle-Means paradigm
became effectively devoid of the instrumentation necessary to regulate newly founded managerial
autonomy. What followed suit was a dramatic increase in agency costs13
. The need for a monitoring
mechanism became desideratum. Without regulatory constraints, managerial latitude in decision making
would intensify without adherence to any regulatory intermediary beyond a Corporation’s Bylaws and
Articles of Incorporation. Absent this mechanism, agency problems would occur where the principle
lacked the necessary power or information to monitor and control the agent14
. Thus the need for corporate
governance mechanisms to “fill the void” emerged to keep executives in check. Subsequently, succeeding
measures manifested as a response to these higher agency costs deregulation had precipitated.
In the end, what sparked the final transitory step which revolutionized corporate governance
followed in the wake up Enron and WorldCom scandals. The government, in an attempt to overhaul the
corporate regulatory institution, enacted Sarbanes-Oxley Act (SOX) 2002. This act imposed new
governance related requirements on publicly traded companies15
. This “corporate cultural change” was
oriented around tougher boards and increasingly active shareholders16
. In the aftermath, the power of the
Corporate CEO was diminished and that of the shareholders was enhanced. What is important to point out
is that the SOX Act did not encumber financial firms to the same extent as nonfinancial firms.
Consequently, financial firms were indirectly granted considerable leeway in the execution of business
activities which operated on the periphery of “sound” business practices.
13
Jonathon R. Macey & Maureen O’Hara, “The Corporate Governance of Banks” (2003) ECO. P. REV 9(1)
14
Burkhart, M.D. Gromb, & F. Panunzi, “Large Shareholders, Monitoring and the Value of the Firm” (1997) Q. J.
ECO 112(3)
15
Sarbanes-Oxley Act (2002) Title III
16
Jonathon R. Macey & Maureen O’Hara, “The Corporate Governance of Banks” (2003) ECO. P. REV 9(1)

8. 8
____________________Chapter Two____________________
1. Shareholder Empowerment
As shareholders gained momentum during the late 20th
century as the overseers of managerial
conduct, the days of the Imperial CEO were all but a distant memory. The Berle-Means paradigm of
separation of ownership and control became somewhat of a relic of a system now characterized by the
notion of “breaking down barriers” and “bridging gaps” between a corporation’s principals and agent.
The premise of managerial hegemony had become replaced by managerial subservience. Shareholder
empowerment equipped shareholders with a new instrument of control – corporate incentive.
Under the new market for corporate control, poorly managed companies which suffered low
valuations on the stock market would attract entrepreneurs who would buy control of the company, fire
the underperformers and renovate the firm for quick profit17
. In theory, this placed directors in a
disenfranchised position where they could no longer to “play it safe” and avail themselves to risk
aversion. This in turn ramped up shareholder control by allowing the principal to “incentivize” the agent
to engage in riskier investment practices to increase valuation on the stock market and prevent hostile
takeovers. From the mid 1980’s through the 1990’s Executives boards became strengthened, executive
pay was restructured to align pay more closely with performance and shareholders became increasingly
willing to influence managerial turnover18
. This new pattern was evidenced by the dramatic increase in
executive dismissals occurring in the early 1990’s19
– forever changing the balance of power between
shareholders at big American firms and the corporate governance landscape.
The new Anglo-American system of corporate governance, now in full swing as of the late 1990’s,
endorsed the view that the exclusive focus of corporate governance should be to maximize shareholder
value20
. This corporate philosophy became institutionalized in the later 1990’s where a mutual agreement
among corporate managers, directors and shareholders emerged that the corporation existed to created
17
Gerald Davis, “The Twilight of the Berle and Means Corporation” Shareholder Empowerment: A New Era in
Corporate Governance (Palgrave Macmillan US 2015)
18
Brian Cheffins, “The Corporate Governance Movement, Banks and the Financial Crisis (2014) (Uni. Camb L. S.
Res Paper 56/2013)
19
Davis, G.F., & Cobb, J.A. “Corporations and Economic Inequality around the World: The Paradox of Hierarchy”
RES ORGAN BEHAV 30
20
Jonathon R. Macey & Maureen O’Hara, “The Corporate Governance of Banks” (2003) ECO. P. REV 9(1)

9. 9
shareholder value21
. Share price maximization came to supersede all other considerations originally
enshrined in Berle-Means paradigm. This proposition has its basis in Gevurtz (2010) hypothesis that
“shareholders with only a short-term planning horizon will be favourably disposed towards excessively
risky behaviour”22
. A prime example of this contemporary was of corporate thinking was evinced by the
Mortgage meltdown subprime scandal. Banks granted mortgages with the intent of holding them until
maturity. After the housing market had been securitized, banks no longer ran the risk of running a loss if
mortgage holders defaulted because the risk had been dissolved23
. Subsequently banks became only
concerned with the short-term returns from the sale of loans. Essentially, according to Dowd (2009) “the
absence of deferred remuneration institutionalized short-termism and undermined the incentive to take
more responsible long-term views”24
. In other words, large financial gains were privatized while losses
would be socialized meaning, shareholders would be indemnified by limited shareholder liability.
The underlying premise of the corporation as a social institution where the paramount interests of the
community would trump those of both shareholders and managers were replaced by new unicameral
forms of organization and financing. The barriers once dividing the dichotomy of ownership and control
began to be bridged by the concept of profit maximization which corporate managers inaugurated as their
new creed, becoming the new standard of measure of managerial performance. This new “shareholder
value” movement had appeared to have ostensibly been indoctrinated into the rubric of corporate
governance. What can be said is that the corporate governance mechanism envisioned by Berle and
Means became a disillusion characterized by a puppet and puppeteer relationship where the hypothetic
line separating control and ownership became the string controlling directors and ultimately their noose
when shareholder value was not maximized.
2. Evolution of Shareholder Liability
Prior to the great depression, the American government took significant measures in order to
safeguard the financial system against hazardous investment. Security measures were invoked under a
protectionist regulatory framework to impute liability to shareholders in order to prevent risky investment
21
Kenneth A. Carow, Gayle R. Erwin & John J. McConnell, “A Survey of U.S. Corporate Financing Innovations:
1970-1997 (1999) J. APP. CORP. FIN 5; Raghuram G. Rajan & Luigi Zingales, “Saving Capitalism from the
Capitalists” (2nd
edn Princeton University Press 2004)
22
Franklin A. Gevurtz, “The Role of Corporate Law in Preventing a Financial Crisis: Reflections on In Re
CitiGroup Inc. Shareholders Derivative Litigation” (2010) GLOBAL. BUS. DEV. L. J. 23(1)
23
Marie-Laure Djelic & Joel Bothello, “Limited Liability and Moral Hazard Implications – An Alternative Reading
of the Financial Crisis” (2014) <http://www.maxpo.eu/downloads/djelic.pdf> accessed February 17, 2015
24
Dowd K., “Moral Hazard and the Financial Crisis” (2009) Cato Journal 29, 141-166

10. 10
and unscrupulous business activities. Pursuant to such laws, bank shareholders were subject to double
liability schemes – liability for corporate obligations in an amount equal to the par value of their shares25
.
This was provided for in the National Banking Act of 1863 whose purpose was to prevent banks from
engaging in excessively risky operations26
. The logic was simple – by making shareholders liable to the
amount of the par value of their shares in addition to the amount invested in such shares, bank creditors
had something more than stock to fall back upon. By providing for liability to an amount equal to the
stock, in addition to the stock, you will have ample security to cover any potential losses27
.
In the years to follow, a wave of bank failure occurred between 1929 and 1933 notwithstanding
double liability. Shareholders faced a lapse in financial capacity to covers the losses which accrued due to
the heavy strains imposed by the double liability system and the National Banking Act of 1863. Support
for the double liability quickly feigned as dissenters rhapsodized how innocent shareholders were
effectively bankrupted without having any management or control of the banks28
. The transition for
limited liability became primed and developed on the basis of the “fairness” rationale whereby the
judiciary moved in favour of limited liability in order to protect innocent shareholders who did not
possess the capacity to influence management decisions29
.
Following the dismantling of double liability systems after 1930, shareholders gained a new
advantageous position. Gevurtz (2010) points out that “the effectiveness of shareholder’s capital
investment in curbing shareholder’s appetite for excessive risk depends upon forcing shareholders to
internalize the societal costs of the financial institutions failure”30
. The birth of the limited liability regime
was considerably bereft of internalizing mechanisms31
whose effect conversely incentivized shareholders
to take larger and more risky investments. The losses incurred would consequently be externalized to 3rd
parties rather than internalized by shareholders. This new inverse in liability was the commercial niche
capitalized on by quasi-financial firms. For example, the following which will be discussed in greater
depth in the forthcoming section, Financial Holding Companies (FHCs) utilized a form of “organization”
25
C.D. Howe Institute, “Shareholder Liability: A New (Old) Way of Thinking about Financial Regulation” (2014)
Commentary No. 401 <https://www.cdhowe.org/pdf/Commentary_401.pdf> accessed 11 Feb 2016
26
Jonathan R. Macey & Geoffrey P. Miller, “Double Liability of Bank Shareholders: History and Implications”
(1992) Wake Forest L. REV. 27, 36
27
CONG GLOBE, 37th
Cong., 3d Sess. 824 (1863)
28
Perry L. Greenwood, “Banks: Liability of Stockholders of Holding Company on National Bank Stock held by
Company” (1944), 7 U. DET. L.J. 123
29
Hearings on H.R. 141 before the House Committee on Banking and Currency, 71st
Cong., 2d Sess. 17 (1930)
30
Franklin A. Geuvurtz, “The Role of Corporate Law in Preventing a Financial Crisis: Reflections on In-Re
CitiGroup Inc. Shareholder Derivative Litigation (2010) GLOB BUS DEV L. J. 23(1)
31
The term internalized is meant to refer to “personal liability”

11. 11
which circumvented dispersed ownership facilitating in enhanced (yet limited) direct shareholder’s
involvement, precipitating a more active role in the management of financial subsidiaries. The result was
that shareholders, protected by limited liability, could influence the direction of managerial performance
and pocket the benefits generated by their firms risky activities while the costs of those risky activities are
passed on to the government through bailouts32
.
32
Peter Conti-Brown, “Elective Shareholder Liability” (2012) STAN. L. REV. 64, 409

12. 12
___________________Chapter Three____________________
1. Deregulation and the Liberalization of the Market
With limited liability at the forefront of corporate policy, America’s financial stability was
burgeoning from the end of the 1970’s through the mid 80’s33
. However, capital accumulation,
specifically in the banking sector, began to stagnate due to limitations imposed by regulatory statutes.
Corporations began to search for ways to increase profitability. A deviation beyond the standard
competence of commercial banks manifested as financial firms shifted away from the traditional methods
of banking and deferred into “extra-financial” activities which lacked strict regulatory ascendency.
Deregulation was at the forefront of liberating market – dispensing with restrictions which had
previously been imposed to control the ambit of financial activities within the sphere of banking. The
prudential measures once in place to govern banking practices had lost their cause and effect in the new
market34
. In response to the macro economic conditions of the 20th
century, deregulation became the fast
track to breaking down financial barriers and facilitating in the accelerated accumulation of wealth.
The deregulation phenomenon was preceded by the repealing of the Monetary Control Act of 1980
followed by the Modernization Act of 1999 allowing for increased diversification of financial activities
which could be undertaken by institutions35
. In 1999, the Glass-Steagal Act, delineating the separation
between commercial and investment banks, was repealed – the result of which functioned as one of the
primary deregulating precursors for such quasi-financial institutions to take shape. In its place the
enactment of the Gramm-Leach Bliley Act (GLBA) finalized the dismantling of the barriers between
commercial and investment banking – permitting the creation of Financial Holding Companies36
. Banks
were no longer cordoned off from the market forces and were given the freedom to engage in business
activities completely unrelated to banking37
.
33
Ozgur Orhangazi, “Financial Deregulation and the 2007-08 US Financial Crisis” (2014) FESSUD Working Paper
Series No. 49
34
Banking regulation had traditionally sought to mitigate the social costs of banks underpricing financial risks by
adopting prudential measures such as deposit insurance and capital adequacy requirements. These were prudential
measures were largely absent in quasi-financial firms. Refer to Mark Fagan, “Shadow Banking: The Past, Present,
Future (2012) Rev. Banking & Fin. L, 31(2) 591
35
Ozgur Orhangazi, “Financial Deregulation and the 2007-08 US Financial Crisis” (2014) FESSUD Working Paper
Series No. 49
36
Jonathon R. Macey & Maureen O’Hara, “The Corporate Governance of Banks (2003) 12 INT REV. FIN 7, 27
37
Ibid p. 96

13. 13
2. The Great Transfer of Power
The deliberate intention of deregulation was meant to provide senior executives of major financial
firms with the expanded managerial latitude to capitalize on the genesis of financial diversification. In
turn, corporate governance should have theoretically counteracted managerial discretion by means of
prudential internal countermeasures strengthening shareholder oversight. These countermeasures were
fundamentally flawed in their application because the structure of Financial Holding Companies did not
resemble the Berle-Means model of ownership divorced from control. In terms of FHC’s, banks became
organized in such a way that some of the largest U.S. banks like Citibank and Bank of America became
wholly owned subsidiaries of holding companies. These holding companies were not governed by the
two-tier structure of corporate governance whereby dispersed ownership facilitated in limited direct
shareholder’s involvement. FHC’s were structured in such a way that shareholders yielded executive
control of the subsidiary firm38
. Moreover, at the subsidiary level, the proportion of board seats held by
outside directors of large banks allowed banks to substantially increase their use of incentive-oriented
executive compensation. Corporate governance became nothing more then a tool re-engineered by the
shareholder class to execute their own interests even at the expense of the firm’s value.
The confluence of these events culminated the what can be termed “the great transfer of power”. This
power shift hypothesis coincides with Useems proposition that institutional stockholders have become the
dominant center of power in U.S. business. This is the result of their continued increase in their holdings
over the last three decades and also the size of their holdings39
, subsequently endowing them with the
ability to display their dissatisfaction with corporate policy by replacing executives with those whose
corporate policies align with their personal interests40
. The wave of dismissals occurring in the 1990’s
reaffirmed the usurpation of control and the change in the balance of power between shareholders and
boards at big American firms41
38
Craig H. Furfane, “Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Market”
(2001) J. BUS 74(1)
39
FHC’s such as JPMorgan Chase, Bank of American Corporation and CITIGROUP Inc. have holdings exceeding
two billion
40
Mark S. Mizruchi, “Berle and means Revisited: The Governance and power of Large U.S. Corporations (2004)
Theory and Society
41
“Thank You and Goodbye”, ECONOMIST, Oct. 28, 1999 <http://www.economist.com/node/254154> accessed
January 27 2016

14. 14
In the end, the corporate governance overture of “supervision” came to be completely bereft of a
modicum of influence relative to FHC’s. This is because such institutions did not operate within the same
structure encapsulated in the Berle-Means paradigm. The capital structure of these firms or institution
rests on consolidation of dispersed ownership under the authority of a single parent company. The
dynamic underpinning the division of ownership and control becomes subsidized by a few dominant
shareholders who can employ the tactic of subsidiarization, or “ring-fencing”, to maintain a legal façade
of separation between parent and subsidiary while retaining the power of influence over their subsidiaries
boards of management42
. Moreover, despite their ostensibly financial nature, their corporate function
differs from that of banks whereby their purpose is characterized as more industrial or “non-financial” by
nature. By this I mean, unlike banks whose integral role is the operation of the national economy, FHC’s
do not share this macro-economic function but rather operate relative to wealth maximization in the
micro-sector of the economy. By this very token, the increased liability of exposure for bank directors and
shareholders had been abated by externalizing risk onto society because the benefits to corporate
industrialization outweighed the risks to society43
, even though FHC’s were far removed from the
principles of traditional banking characterized by the safety and soundness of the financial sector and the
protection of depositors44
.
42
Anat R. Admati, Peter Conti-Brown & Paul Pfleiderer, “Liability Holding Companies” (2012) 59 UCLA L. REV.
852
43
Louise Gullifer & Jennifer Payne”, Corporate Finance Law: Principles and Policy (2nd
edn Hart Publishing ltd.
2015)
44
Mark Fagan, “Shadow Banking: The Past, Present, Future” (2012) REV. Banking FIN. L. 31(2) 591

15. 15
_____________________Conclusion_____________________
The premise underpinning doctrine of limited liability was meant to insulate shareholders from
the downside risks associated with commercial practice. By being shielded themselves from debt
obligations arising from business related risk exposure, shareholders possessed the means by which they
could undertake riskier investments in order to increase corporate growth. However, with limited liability
came an increased level of discretion among managerial executives. Shareholders became at risk where
their interests could be superseded by the newly broadened managerial latitude in decision making.
Combined with the deregulation of the financial market, there were no longer any external control
mechanisms which could effectively temper managerial discretion.
The need for corporate governance as an internal mechanism of oversight emerged as lobbying
efforts prompted the relaxation of rules that created obstacles to shareholder intervention in corporate
affairs. The traditional Berle-Means paradigm of separation of ownership and control no longer was
effective at managing the evolving relationship between shareholders, executives and the market forces
driving the economy. As corporate governance emerged as the countermeasure to assuage managerial
discretion in decision making, it also facilitated as an instrument utilized by shareholders to bridge the
division between ownership and control.
In the aftermath of the deregulation of the financial market and the Enron and WorldCom
scandals, a corporate cultural change ensued praising the need for tougher boards and increasingly active
shareholders. This became known as the era of shareholder activism. Shareholder empowerment
effectively turned the tide of managerial hegemony and ushered in the new doctrine of managerial
subservience. Their new weapon of choice was corporate incentive. What corporate governance had
effectively done was give shareholders the leeway, within the new playing field of the principal and agent
relationship, to “instruct” the boards of executives to perform in certain way. In other words, executive
pay was restructured to align pay for closely with performance. Where performance was not met,
shareholders had the authority to influence managerial turnover.
In essence, shareholders now possessed the indirect means to manipulate corporate decision
makers to engage in riskier investment practices while maintaining the distinction between ownership and
control as required by US Statute. This “division” became even more blurred with the introduction of
legislative changes which repealed limitations which had previously cordoned banks off from certain

16. 16
market forces – those of the non-financial sector. The introduction of the Gramm-Leach Bliley Act
allowed firms to create Financial Holding Companies – financial institutions engaged in nonbanking
activities that offer financial services. This new corporate form – quasi-financial firms - was robust that
it’s structure completely departed from the Berle-Means division of ownership and control, as well as
corporate governance mechanisms. Shareholders of the parent financial holding company were granted
direct involvement of the subsidiary financial institutions. All in all, the division between ownership and
control was completely obscured. Shareholders could now effectively govern the decision making of it’s
subsidiary firms and hire owners of Banks as “oversight committees” to supervise executive boards.
Investment practices were became exclusively geared towards profit maximization while societal costs
were marginalized.
The corporate form had evolved into a nearly an impenetrable flak jacket. Shareholders were
granted unprecedented latitude to pursue riskier investment practices within an unregulated market.
Combined with the influx of incentive based practices meant to “strong-arm” directors to pursue riskier
investment, while remaining sheltered under the protection of the business judgement principle – the shift
in the commercial finance sector provided the impetus for shareholders to exert significant influence
without impunity under the safety of limited liability.

17. 17
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“Thank You and Goodbye”, ECONOMIST, Oct. 28, 1999
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