According to a common narrative, in addition to inadequate capital and liquidity, the failure of banks in the financial crisis also reflected their poor governance. By governance we mean broadly the oversight that comes from banks? own shareholders and other stakeholders of the way in which they are run.
The problem of bank governance stems from the way in which banks are financed and regulated, from the externalities bank failures produce, and from the nature of their assets. In the period leading up to the financial crisis, it was believed that regulation would cause banks to internalize the costs of their activities, meaning that what maximized bank shareholders? returns would also be in the interests of society. Consequently large banks used the same governance tools as non-financial companies to minimize shareholder-management agency costs, namely independent boards, shareholder rights, the shareholder primacy norm, the threat of takeovers, and equity-based executive compensation. Unfortunately, such tools had the adverse effect of encouraging bank managers to take excessive risks: as we describe in this chapter, banks that had the most ?pro-shareholder? boards and the closest alignment between
executive returns and the stock price were those which took the most risks prior to, and suffered the greatest losses during, the crisis. Consequently, a significant rethink about the way in which banks are governed is required. The structure and function of bank boards, the compensation of bank executives and the function of risk management within organizations needs careful crafting if governance reforms are to address not exacerbate bank failures.
Starting from the well-evidenced fact that banks with shareholder-focussed corporate governance fared worse in the financial crisis than those without, this paper considers various initiatives and proposals to re-orient board rules in relation to...Read more
This article tells how a shareholder class action against Teva Pharmaceutical Industries, the largest generic drug maker in the world, ended the practice of hiding individual executive pay figures by companies crosslisted in Israel and the United...Read more
This study documents the danger of limiting the coverage of mandatory pay disclosure. Exploiting the 2013 rule change in Korea, we find that its restrictive coverage, confined to registered board members with total annual pay exceeding 500...Read more
This paper is the introductory chapter of Luca Enriques and Tobias Tröger (eds.), The Law and Finance of Related Party Transactions (Cambridge University Press: forthcoming). Its goal is to sketch out the individual chapters’ contributions to the...Read more