4  BIS central bankers’ speeches  purposes a co-partner in the business transacted by it. True, he is only one partner amongst a thousand others in your Bank; but that does not release him from the obligation of doing what he can for the common good” (Rae (1885)). Walter Leaf, chairman of Westminster Bank Ltd, writing in the 1920s remarked: “The confidence in British banking which has been acquired by long experience is mainly due to the sense that Directors have conducted the business of their banks with constant attention to public interests in the first place” (Leaf (1937)). The public good remained centre-stage in companies’, and in particular banks’, objectives. Yet even as Rae and Leaf were writing, shareholders’ focus on returns was sharpening. Rae comments: “There are shareholders to be found here and there, to whom their own Bank would appear to be a hostile institution, which it is their business to attack on the slightest pretext… He is disappointed with the dividend, and objects to the balance carried forward to next year as excessive” (Rae (1885)). The legal framework underpinning companies was also starting to fray. It had failed to keep pace with the boom in the number of shareholders and their quest for dividends. Cases of company fraud began to proliferate (Ireland (2010)). In 1848, Arthur Smith published a pamphlet where he uncovered that most railway companies – the poster child for the modern corporation – were in fact profitless and paying dividends to shareholders out of capital (Smith (1848)).

But under the current shareholder-centric model, these wider stakeholders are not given any control rights over management. This constrains their ability to rein in managerial excesses, even though their incentives to do so may be sharpest. In other words, the standard corporate governance model may be predicated on a misclassification of risk and, as a result, a misalignment between these risks and control rights, with potentially adverse implications for corporate risk-taking. Companies and society (a)  Externalities and systemic risk  At least for some types of firms, their actions can have an impact beyond internal stakeholders – shareholders, creditors, employees, customers and clients. They impose social externalities on the economy and wider society. If companies’ objectives are shareholder-centric, these externalities are unlikely to be internalised fully within firms’ decision-making. In other words, there is a potential disconnect between company and societal incentives. These externalities can be both good and bad. For example, many companies are in the business of creating public or quasi-public goods – for example, health, education, transport and utilities. And that is why, historically, their corporate governance structures have typically tended to weigh broader stakeholder and societal interests. In other cases, these social externalities may be negative – the creation of public “bads”. The classic example is environmental pollution. But these social externalities can also arise in more subtle ways – the mistreatment of customers and clients through delayed payment or mis-selling, exploitation of employees through inadequate working practices, or attempts to avoid paying sufficient tax to government.