Putting Creditors in Their Rightful Place: Corporate Governance and Business Ethics in the Light of Limited Liability

Contemporary academic and policy discussions of corporate governance tend to accord primacy to the interests of shareholders. While the primacy (descriptive or prescriptive) of shareholders is argued for in various ways, others seek to promote a wider stakeholder model of the firm and its governance. In both cases, the interests of creditors tend to be neglected. In this paper, the fundamental position of creditors in a system of corporate law that offers limited liability is reasserted and explained, and the implications explored. It is demonstrated that there are, in effect, two modes of governance possible for a limited liability corporation: the "normal" mode, when shareholders' interests are primary, and the "distressed" mode, when creditors' interests are paramount. As a result of this analysis, writers on corporate governance who are influenced by certain managerial myths or economic theories of the firm are encouraged to view the position of shareholders in a more informed light. Writers on business ethics, who often find themselves contending, perhaps implicitly, with inappropriate understandings of the nature of business corporations and their governance, are similarly alerted to the weakness of certain positions perceived as antithetical to their agenda. Finally, business ethicists who advocate a stakeholder perspective are encouraged to recognize the position of creditors and to pay more attention to them as a stakeholder group.