Corporate Governance of Banks and Financial Institutions: Economic Theory, Supervisory Practice, Evidence and Policy

Abstract

Banks are special, and so is the corporate governance of banks and other financial institutions. Empirical evidence, mostly gathered after the financial crisis, confirms this. Banks practicing good corporate governance in the traditional, shareholder-oriented style fared less well than banks having less shareholder-prone boards and less shareholder influence. The special governance of banks and other financial institutions is firmly embedded in bank supervisory law and regulation. Most recently there has been intense discussion on the purpose of (non-bank) corporations. For banks stakeholder governance and, more particularly, creditor or debtholder governance is more important than shareholder governance. The implications of this for research and reform are still uncertain. A key problem is the composition and qualification of the board. The legislative task is to enhance independent as well as qualified control. The proposal of giving creditors and even supervisors a special seat in the board is not convincing. Other important special issues of bank governance are for example the duties and liabilities of bank directors in particular as far as risk and compliance are concerned, but also the remuneration paid to bank directors and senior managers or key function holders. Claw-back provisions, either imposed by law or introduced by banks themselves, exist already in certain countries and are beneficial. Much depends on enforcement, an understudied topic.

Note: This article is published in the Max Planck Private Law Research Paper Series through Open Access funding provided by Max Planck Society. It is distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY 4.0). No changes were made to the article. As published in: European Business Organization Law Review 22 (2021), 13–37, DOI: 10.1007/s40804-020-00201-z.

Keywords: Corporate governance, Economics of bank governance, Debtholder governance, Purpose of the (bank) corporation, Financial institutions, Bank regulation, Bank supervision