‘Something distinctly not of this character’: how Knightian uncertainty is relevant to corporate governance

Author:

Belcher Alice

Abstract

Corporate governance best practice now includes the requirement for a board to ensure that the system of internal control is effective in managing risks in the manner which it has approved. The Turnbull Guidance on this matter is ‘based on the adoption by a company's board of a risk-based approach to establishing a sound system of internal control and reviewing its effectiveness’. This involves the identification and prioritising of risks and embedding the risk management approach in the culture and processes of the business. This article explores the use of risk assessment in the law, particularly as it applies to the activities of companies. It is suggested that a concentration on, and perhaps a spurious quantification of, risk could mask the difficulty of making board-level decisions under conditions of true or Knightian uncertainty. Knight maintained that true uncertainty was something distinctly not of the character of risk. It occurs when ‘. . . there is no possibility of forming in any way groups of instances of sufficient homogeneity to make possible a quantitative determination of true probability. Business decisions, for example, deal with situations which are far too unique, generally speaking, for any sort of statistical tabulation to have any value for guidance. The concept of objectively measurable probability or chance is simply inapplicable’.

Publisher

Cambridge University Press (CUP)

Subject

Law

Reference37 articles.

1. The Sheen Report, MV Herald of Free Enterprise Report No 8974 (Department of Transport, 1987) para 14.

2. Re Living Images Ltd [1996] BCC 112, Secretary of State for Trade and Industry v Ashcroft (No 2) 2000 WL 877739, Re Richborough Furniture Ltd [1996] 1 BCLC 507, Re DGA (UK) Ltd 2001 WL 482928.

3. Collective Conditional Fee Agreements Regulations 2000, SI 2000/2988, reg 4(4). See Cavanagh v Athenaeum Press Ltd [2003] CLY 333 for a decision on the components of a success fee.

4. X v HM Customs & Excise [2005] EWHC 953 (Admin): the decision-maker's obligation was to evaluate all the material factors and to take them into account, but the author of the risk assessment was not aware them.

5. R v D [2005] EWCA Crim 3660, [2006] 2 All ER 726 at 729.

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