Governance of Banks in an Era of Regulatory Change and Declining Public Confidence

Abstract

Corporate governance reforms have become more intrusive for banks than might be thought appropriate for “ordinary corporates”. “Heavier” regulation in this area is justified by the public interest at stake in bank activity and the risk to the public interest if a bank is allowed to fail (and the cost to the public of saving a bank from failure). The public interest (and the interest of all stakeholders) also has implications for the scope of the duty of care of bank directors. Conventional concepts of corporate governance address traditional risk areas in banking activity as well as tensions such as the “agency problem” and the need for oversight by directors of senior management. However, a new set of issues related to public trust has been triggered by the LIBOR scandal and most banks, and many commentators, profess a desire to “restore public trust” and address acknowledged shortcomings in their approach to ethical questions and the soundness of their corporate culture. A related, but different, set of challenges arises as a result.