Bank Corporate Governance: A New Paradigm
Open Review of Management, Banking and Finance, (Forthcoming)
27 Pages Posted: 23 Dec 2016 Last revised: 5 Jan 2017
Date Written: December 23, 2016
Failures of the corporate governance of banking firms were one of the major causes of the 2007-09 Great Financial Crisis. Various reforms have been enacted to ameliorate Governance standards, notably risk management and incentive systems; but the key driver remains the improvement of shareholders rights, with a view to ensuring sustainable value creation. Instead, in this paper it is argued that, to strive for a structural advance in the risk appetite framework of the banking firm, the fundamental assumption behind corporate governance – i.e. that the ultimate authority lies in shareholders (the “owners”) who detain exclusive voting rights – should be reconsidered. To start with, it is recalled that, according to the options enterprise model, the effective owners of a corporation can be identified with its debt holders. More specifically and more recently, in the case of banking firms, the bail-in/resolution mechanisms enacted create new obligations and responsibilities for holders of subordinated debt: accordingly, the traditional corporate governance framework should be modified to allow – in appropriate forms – for their voting rights and presence in the Board of Directors/Supervisory Board.
Keywords: Corporate governance, banks, shareholders and subordinated debtholders rights, investor protection, financial regulation
JEL Classification: G01, G2, G3, G32, G39
Suggested Citation: Suggested Citation