The Corporate Governance of Banks. (Part 2: The Governance of Banks)

1. INTRODUCTION Few public policy issues have moved from the wings to center stage as quickly and decisively as corporate governance. (1) Virtually every major industrialized country as well as the Organisation for Economic Co-operation and Development and the World Bank has made efforts in recent years to refine their views on how large industrial corporations should be organized and governed. Academics in both law and economics have also been intensely focused on corporate governance. (2) Oddly enough, despite the general focus on this topic, very little attention has been paid to the corporate governance of banks. This is particularly strange in light of the fact that a significant amount of attention has been paid to the role that the banks themselves play in the governance of other sorts of firms. (3) In this paper, we explain the role that corporate governance plays in corporate performance and argue that commercial banks pose unique corporate governance problems for managers and regulators, as well as for claimants on the firms' cash flows such as investors and depositors. The intellectual debate in corporate governance has focused on two very different issues. The first concerns whether corporate governance should focus exclusively on protecting the interests of equity claimants in the corporation, or whether corporate governance should instead expand its focus to deal with the problems of other groups, called "stakeholders" or nonshareholder constituencies. The second issue of importance to corporate governance scholars begins with the assumption that corporate governance should concern itself exclusively with the challenge of protecting equity claimants, and attempts to specify ways in which the corporation can better safeguard those interests. The Anglo-American model of corporate governance differs from the Franco-German model of corporate governance in its treatment of both issues. The Anglo-American model takes the view that the exclusive focus of corporate governance should be to maximize shareholder value. To the extent that shareholder wealth maximization conflicts with the interests of other corporate constituencies, those other interests should be ignored, unless management is legally required to take those other interests into account. The Franco-German approach to corporate governance, by contrast, considers corporations to be "industrial partnerships" in which the interests of long-term stakeholders--particularly banks and employee groups--should be accorded at least the same amount of respect as those of shareholders. (4) The Anglo-American model of corporate governance also differs from the Franco-German model in its choice of preferred solutions to the core problems of governance. Specifically, the market for corporate control lies at the heart of the Anglo-American system of corporate governance, while the salutary role of nonshareholder constituencies, particularly banks and workers, is central to the Franco-German governance model. At the outset, we note that it is strange that paradigms of corporate governance differ on the basis of national boundaries rather than on the basis of the indigenous characteristics of the firms being governed. Of course, the extent to which either the Anglo-American model or the Franco-German model of corporate governance exists as more than theoretical constructs is a matter of debate. There is doubt about the extent to which the European system really protects the interests of nonshareholder constituencies, just as there is debate over whether the interests of U.S. management are as closely aligned with those of shareholders as is generally claimed. However, differences in corporate governance systems do exist. Moreover, the distinctions between these two paradigms of corporate governance are quite useful in framing the analysis in this paper. We begin with an overview of the topic of corporate governance and proceed to a discussion of the particular corporate governance problems of banks. …