Corporate Governance in Banking

Corporate Governance in Banking

A Global Perspective

Edited by Benton E. Gup

Recent corporate scandals, together with the effects of globalization, have led to an increasing interest in corporate governance issues. Little attention has been paid, however, to international laws and recommendations dealing with corporate governance in banking from a global perspective. This impressive international set of expert contributors – academics, practitioners and regulators – remedies the lack of attention by examining the various issues and concerns of this important topic.

Chapter 4: Corporate Governance at Community Banks: One Size Does Not Fit All

Robert DeYoung

Subjects: business and management, corporate governance, economics and finance, corporate governance, financial economics and regulation, money and banking, law - academic, corporate law and governance, finance and banking law


4. Corporate governance at community banks: one size does not fit all Robert DeYoung The corporate form of organization is one of the cornerstones of market capitalism. Business firms with good investment opportunities can access the necessary growth capital from household savers, and household savers can own (portions of) these business firms with the protection of limited liability. While this set-up yields tremendous economic efficiencies, it contains a seed of inefficiency as well. The shareholders obviously want the highest possible return on their investment, but as absentee owners they are in a poor position to observe how well the business is being run. To achieve some amount of control over the business, the owners select from among themselves a corporate board of directors to represent shareholder interests. The most important task for the directors is to hire professional managers to run the firm in a manner that maximizes the shareholders’ investment. While this framework solves the owners’ most immediate problem, it also gives rise to two fundamental ‘corporate governance’ problems: what is the best way for directors to motivate managers to maximize the value of the business, and what is the best way to motivate the directors to see that this is done? Unfortunately, there is no generally agreed-upon set of ‘best practices’ for good corporate governance. The optimal combination of base salary, stock grants, stock options, and other forms of executive compensation is a greatly debated issue. Less debated, but perhaps no less important, are the incentives...

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