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  • Print publication year: 2021
  • Online publication date: May 2021

10 - Compliance as Liability Risk Management

from Part I - Compliance Concepts and Approaches


Abstract: It is natural to think of compliance in terms of liability risk management. In the face of potentially massive liability exposure, it behooves boards of directors and senior executives to take costly steps to reduce these risks for the sake of the firm and its shareholders, akin to other serious enterprise risks. The liability risk management perspective treats compliance as a matter of business judgment rather than a moral or cultural imperative, which has important consequences. The prevailing idea is that firms are expected to invest in precaution (i.e., compliance investments) up to a level where the marginal benefits in terms of diminished liability risk to the firm equal the marginal costs associated with such efforts. This chapter explores from a multidisciplinary perspective the consequences of adopting a liability risk management perspective along three dimensions: the agency cost problem (i.e., whose risk is being managed); the social construct invoked as a result (the problem of cultural legitimacy); and the clash between a company’s own assessment of liability risk and sound public policy.

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