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

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    4 Citations (Scopus)

    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’.
    Original languageEnglish
    Pages (from-to)46-67
    Number of pages22
    JournalLegal Studies: the Journal of the Society of Legal Scholars
    Volume28
    Issue number1
    DOIs
    Publication statusPublished - Mar 2008

    Keywords

    • Corporate governance

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