Why do economic consulting firms exist?

Directors’ duties are the reason why the companies hire economic consultants. What consultants say isn’t important; the fact that simply the directors of a company sought advice is what matters. Same goes for the public sector: you must know what you’re doing,  you took advice from outside experts.

Central to avoiding being sued if the company goes broke, or otherwise gets into a spot of bother, is the directors show that they acted responsibly.

Central to this is they can show they took advice from esteemed advisers: an accountant, a lawyer and an economist. If they did so, they must be responsible prudent directors because they took advice.

Deirdre McCloskey argued that the advising industry lives off 19th century case law on directors’ and trustees’ duties.

If you take advice – from an accountant, a lawyer or an economist – and the business or investment still fails, it can’t be your fault that you lost the widow’s and orphans’s inheritance.

You took advice. That is what that 19th-century court held with regard to what directors do and do not have to do given the fact that are not involved in the business on a day to day basis.

James Burk, a sociologist and former stockbroker… found that the advice giving industry sprang from legal decisions in the early 19th century.

The courts began to decide that the trustee of the pension fund or a child’s inheritance could be held liable for bad investing if they did not take advice. The effect would have been the same had the court decided that prudent man should consult a Ouija boards or the flight of birds…

America decided through its courts than an industry giving advice on the stock market should come into existence, whether or not it was worthless.

Therefore, it doesn’t matter what you say as a consultant economist to a company, the fact you’ve said something to them is more important to them than what you are saying. Seeking and receiving your advice excused them from being sued for breach of their directors duties for a couple of days.

1 Comment (+add yours?)

  1. dragonfly
    Feb 02, 2015 @ 16:42:46

    This is pretty much what happened with Feltex.

    Like

    Reply

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