A Global Perspective
Edited by Benton E. Gup
Chapter 4: Corporate Governance at Community Banks: One Size Does Not Fit All
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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