For further details please see: http://www.edelman.com/. 2  Full letter published on Business Insider. See http://www.businessinsider.com/larry-fink-letter-to-ceos-2015-4?IR=T. BIS central bankers’ speeches  1  (Mayer (2013)) and Lynn Stout’s The Shareholder Value Myth (Stout (2012)) each raise deep and far-reaching questions about the purpose and structure of today’s companies. Are these concerns legitimate? What is their precise micro-economic source? And are they now of sufficient macro-economic importance to justify public policy intervention? To answer those questions, it is useful to start with the origins of modern-day companies, before looking at the potential incentive problems among stakeholders embedded in those structures. Finally, I consider public policy actions that might mitigate these problems. These problems are not specific to any industry. But banks’ balance sheets and governance structures mean they may be especially prone to these incentive problems. So I will use them to illustrate some of the micro-economic frictions and their macro-economic impact. Indeed, it is no coincidence that the most significant changes to corporate governance practices recently have been within the banking sector. A short history of companies Let me begin by defining “corporate governance” in its broadest sense: as the set of arrangements that determine a company’s objectives and how control rights, obligations and decisions are allocated among various stakeholders in the company (Allen and Gale (2000)). These stakeholders comprise not only shareholders and managers, but also creditors, employees, customers and clients, government, regulators and wider society. Over the past two centuries, several dozen pieces of company legislation have been enacted in the UK alone.

Although substantial progress has been made, many households still need to rebuild their net worth following the housing bust. More than 20 percent of homeowners with a mortgage are “underwater” – meaning they owe more on their home than it can be sold for. •  Fiscal drag. State and local governments have been cutting spending for over two and half years and federal government spending is also contracting. While fiscal consolidation is essential over the medium to long term, spending cuts reduce demand and are a drag on near-term growth. •  Risks relating to Europe. The crisis in the euro area has reduced the demand for U.S. exports and weighed on financial markets. •  Fiscal uncertainty at home. Families and firms face elevated uncertainty relating to future taxes and government spending, in particular from the so-called “fiscal cliff” –  4  BIS central bankers’ speeches  the prospect of sharp increases in taxes and cuts in spending at the start of 2013 if Congress and the White House cannot agree on an alternative fiscal plan. Given the signs of improvement in some of these areas, including the slow but steady progress in healing balance sheets and restoring the supply of credit, I anticipate that the pace of economic growth will gradually pick up, supported by very low interest rates. But heading into the FOMC meeting last week, I judged that, if we did not ease monetary policy further, the pace of improvement would be unacceptably slow.