Kokkinis, A; (2014) Rethinking the corporate governance of UK banks. Doctoral thesis , UCL (University College London).

Abstract

This thesis examines the rapidly evolving corporate governance framework for UK banks to enquire whether a radical change of paradigm is necessary in order to build a resilient financial system. The UK corporate governance paradigm largely reflects the nexus of contracts conceptualisation of the company, and focuses primarily on the maximisation of shareholder value through the pursuit of profitability and the minimisation of managerial agency costs. However, the regulatory reforms introduced subsequent to the global financial crisis of 2007-2009, both domestically and at the EU level, are currently transforming several aspects of bank corporate governance – most notably, executive remuneration and the regulatory scrutiny of senior appointments in banks – in a way that detracts from the shareholder value model in favour of emphasising the public interest in ensuring that banks are managed in a safe and sound manner. Nevertheless, these reforms fall short of achieving a full paradigm shift, as the duties owed by bank directors still reflect the enlightened shareholder value approach, and the power of equity investors to encourage excessive risk taking by banks remains intact. This thesis argues that a shareholder-centric corporate governance model for banks is fundamentally inconsistent with safeguarding financial stability as a public good, given the strong incentives that shareholders have to encourage banks to take risks, which – even if optimal from the shareholders’ perspective – are value-decreasing for society as a whole. The general inability of depositors and bondholders to monitor risk taking by banks effectively further exacerbates this problem. It is therefore argued that the existing prudential regulatory framework ought to be complemented by taking a regulatory approach to bank corporate governance, with a particular emphasis on reforming banks’ corporate objective to reflect the importance of long-term financial sustainability which – in turn – necessitates a reform of the duties owed by bank directors and senior managers to reflect the public interest in financial stability.

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