Disembedding Corporate Governance: The Crisis of Shareholder Primacy in the UK and Canada

The Global Financial Crisis (GFC) has been the subject of much academic discussion, yet there is no consensus on its root cause. This paper traces the origins of the GFC back to the effects of the Anglo-American model of corporate governance on large financial institutions, and in particular to that model’s emphasis on shareholder primacy. Drawing on Karl Polanyi’s notion of “embeddedness” and Hyman Minsky’s financial instability hypothesis, the author notes that the emphasis on shareholder primacy creates perverse corporate incentives that are detached or “disembedded” from their economic, political and social context. He argues that these perverse incentives were the root cause of the GFC and the subsequent economic and political turmoil. The trajectory of the GFC in both Canada and the UK was shaped primarily by the relative disembeddedness of large financial institutions. In particular, excessive risk-taking by those institutions, combined with a weakening of prudential regulation, led to the emergence of a system that was divorced from its economic and social context. As Minsky predicted, the cracks that developed in this disembedded system compelled states to use fiscal and monetary policy to prevent a depression, sowing the seeds of political unrest in the aftermath of the GFC. The author concludes that long-term economic stability requires that shareholder primacy be replaced with a corporate governance model that acknowledges the economic, political and social influence of financial institutions.