Non-Shareholder Voice in Bank Governance: Board Composition, Performance and Liability
Our paper, Non-Shareholder Voice in Bank Governance: Board Composition, Performance and Liability, takes as its general starting point the extensive costs inflicted on taxpayers and those denied credit by the bank failures which occurred at the end of the first decade of this century. A much-noted aspect of these failures was that those banks which adhered most closely to the standard model of shareholder-focussed corporate governance were the ones which fared the worst in the crisis. Consequently, proposals for reform of bank boards, in order to reduce the risk of a repeat of these negative externalities, have become widespread.
In this paper, we examine three types of reform: first, giving the public interest or creditors more influence over board decisions, without placing public interest or creditor representatives on the board; second, taking the further step of placing such representatives on the board; and, third, increasing the liabilities to which board members are exposed, under both criminal and civil law.
We think that the first set of reforms aim in the right direction and, indeed, as far as the public interest is concerned have already been substantially implemented within the EU (including the UK). We are sceptical, however, about the value of direct board representation, for either the public interest or for creditors. We also conclude that the proposals for enhanced criminal and civil liability for bank directors are likely to have unwelcome consequences, but we do think there is a proper role for more rigorous enforcement of the existing criminal, civil and administrative liabilities to which bank directors and senior managers are exposed.