Corporate Governance and Culture in Banking

Abstract

Banks differ from non-financial firms. These differences affect the manner of agency conflicts between the various bank stakeholder groups compared with non-financial firms. However, the main corporate governance arrangements used in the banking industry to mitigate these agency conflicts are largely similar to those of non-financial firms. A case in point is executive compensation. No other major industry has less equity on the balance sheet than banking. However, executive pay in banking is linked to shareholder wealth just as in other industries thus exacerbating existing incentives for bank managers to shift risk. Further, the governance arrangements in banking make the corporate culture prevailing in banks an important subject to study. This chapter reviews the literature on corporate governance in banking with a focus on those aspects of corporate governance in which banks (should) differ from non-financial firms, that is, executive compensation, the composition of the board of directors, and culture in banks. The chapter encourages a more profound rethink of the corporate governance of banks.