Chapter 2: Corporate Governance in Banks: Does the Board Structure Matter?
Benton E. Gup INTRODUCTION Globalization and the increased demand for better corporate governance are two major trends aﬀecting banking; and the two trends are inexorably intertwined. The term globalization, as used here, refers to the cross-border operations and ownership of businesses in general and banks in particular. The growth of globalization raises issues about the corporate governance of banks. The issues are complicated by the fact that the deﬁnitions of banks, their permissible activities, and their stakeholders vary around the world.1 Nevertheless, everyone agrees that good corporate governance is important. But what does that mean? Does it mean that organizational structure of corporate boards is important, or that good management is important, or both, or are other issues involved? The corporate governance issue is puzzling because diﬀerent organizational structures exist throughout the world; and there are examples of good and bad corporate governance in every country. DEFINITIONS OF CORPORATE GOVERNANCE The Anglo-American Model In an international survey of corporate governance, Shleifer and Vishny (1997) say that corporate governance ‘deals with the ways in which supplier of ﬁnance to corporations assure themselves of getting a return on their investment’. They argue that corporate governance is primarily concerned with principal agency problems between ownership and control. Stated otherwise, it deals with problems that arise because of the separation between shareholders and management. This Anglo-American or ‘shareholder model’ of corporate governance is accepted in the United States, England and some other countries. 18 Corporate governance in banks 19 OECD de...
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