following the bail - outs at a remarkable £150bn in 2009. since then, it has fallen substantially – to around £10bn in 2013 – as regulatory reforms have been put in place to constrain risk - taking and the financial strength of banks has improved. but it remains in positive territory, suggesting an on - going distortion to risk - taking incentives. public policy responses the modern company harbours a range of micro - economic frictions. in some cases, these seem likely to have generated significant macro - economic costs, in the form of sub - optimally low rates of investment and sub - optimally high degrees of risk - taking. these issues – low growth and high risk – are the bread and butter of central banking. these costs are not the fault of any party, whether businesses or investors or other stakeholders. rather they are the result of the incentives embodied within the current structure of companies. these frictions are not just multiple, but potentially interact in important ways. when framing policy choices, that means heeding the “ theory of the second best ”, in the sense of lipsey and lancaster ( 1956 ) ) : with multiple frictions, taking measures to address a friction in one place need not necessarily lead to an improvement in social welfare in aggregate. as one example of that in a corporate governance context, the shift to equity - based compensation practices in the 1980s and 1990s addressed one incentive friction – the principal / agent problem between shareholders and managers. but it may have done so at the expense of amplifying other incentives frictions – for example, it may have amplified riskshifting incentives from shareholders to creditors and to wider society. in some areas, there has been considerable progress in tackling some of these incentive frictions since the crisis, especially among banking firms. one prominent example is regulatory capital reform. significant increases in banks ’ equity and loss - absorbing capital have been put in place or are planned. this is likely to have reduced the incentives of shareholders to engage in risk - shifting, either to creditors or to wider society, thereby lowering the macro - economic costs of these activities. 20, 21 but there are also areas where there has been somewhat less progress and more may be needed to mitigate corporate governance frictions. all involve acting on the structure of incentives at source, to generate higher returns for lower risk for businesses, investors and, admati and hellwig ( 2014 ). there have also been initiatives aimed at increasing levels of accountability amongst senior individuals in financial

institutions. one example is the pra and fca ’ s senior managers regime ( smr ) which will come into force in march 2016. the smr intends to create stronger incentives for senior individuals to run institutions prudently and to take greater responsibility for their actions. the pra has also recently published a consultation on its expectations of the collective responsibilities shared by board members which will complement the smr. the pra published its consultation paper “ corporate governance : board responsibilities ” in may 2015, available at : http : / / www. bankofengland. co. uk / pra / documents / publications / cp / 2015 / cp1815. pdf. bis central bankers ’ speeches ultimately, wider society, helping central banks meet their objectives. let me mention three areas in particular : executive remuneration and accountability ; control rights ; and company law. executive remuneration and accountability historically, perhaps the most commonly - pursued approach to tackling corporate finance problems has been to adjust managerial compensation practices – for example, the shift to equity - based compensation practices in the 1980s. this shift worsened incentive problems elsewhere within firms. in response, attention more recently has switched to paying executives in debt, rather than equity. the aim here is to align managerial incentives with those of wider stakeholders, specifically creditors, so mitigating risk - shifting incentives. this is not a new idea. in their original paper on risk - shifting, jensen and meckling proposed structuring a ceo ’ s compensation such that it was aligned with the firms ’ debt - toequity ratio. in practice, companies in general, and financial firms in particular, have fallen well short of that objective. fewer than 1 % of bank ceos have been found to have remuneration packages with debt - to - equity ratios greater than their firms. 22 the new eu bonus cap rules also arguably weaken the link between performance and compensation as they shrink the proportion of variable pay and make it harder to cut back total remuneration. 23 since the crisis, consideration has been given by both academics and policymakers to switching remuneration practices towards debt - like instruments ( for example, becht, bolton and roell ( 2011 ), pcbs ( 2013 ) ). this appears to have had some policy impact. for example in europe, payment in debt instruments is now permitted under the new capital requirements directive iv ( crd iv ). to date, however, there are only limited signs of remuneration practices