Apropos the prior post on the fiduciary duties of bank directors, I just read an excellent and provocative article by Chris Bruner. Conceptions of Corporate Purpose in Post-Crisis Financial Firms (March 5, 2013). Seattle University Law Review, Vol. 36, p. 527, 2013; Washington & Lee Legal Studies Paper No. 2012-29. Available at SSRN: http://ssrn.com/abstract=2228845. Here's the abstract:
Abstract: American "populism" has had a major impact on the development of U.S. corporate governance throughout its history. Specifically, appeals to the perceived interests of average working people have exerted enormous social and political influence over prevailing conceptions of corporate purpose - the aims toward which society expects corporate decision-making to be directed. This article assesses the impact of American populism upon prevailing conceptions of corporate purpose - contrasting its unique expression in the context of financial firms with that arising in other contexts - and then examines its impact upon corporate governance reforms enacted in the wake of the financial and economic crisis that emerged in 2007.
I first explore how populism has historically shaped conceptions of corporate purpose in the United States. While the "employee" conceptual category best encapsulates the perceived interests of average working people in the non-financial context, the "depositor" conceptual category best encapsulates their perceived interests in the financial context. Accordingly, American populism has long fostered strong emphasis on the interests of bank depositors, resulting in striking corporate architectural strategies aimed at reducing risk-taking to ensure firm sustainability - notably, imposing heightened fiduciary duties on directors and personal liability on shareholders. I then turn to the crisis, arguing that growing shareholder-centrism over recent decades goes a long way toward explaining excessive risk-taking in financial firms - a conclusion rendering post-crisis reforms aimed at further strengthening shareholders a surprising and alarming development. While populism has remained a powerful political force, it has expressed itself differently in this new environment, fueling a crisis narrative and corresponding corporate governance reforms that not only fail to acknowledge the role of equity market pressures toward excessive risk-taking in financial firms, but that effectively reinforce such pressures moving forward.
I conclude that potential corporate governance reforms most worthy of consideration include those aimed at accomplishing precisely the opposite, which may require resurrecting corporate architectural strategies embraced in the past to reduce risk-taking in financial firms. As a threshold matter, however, we must first grapple effectively with a more fundamental and pressing social and political problem - the popular misconception that financial firms exist merely to maximize stock price for the short-term benefit of their shareholders.
I don't agree with all of his arguments or conclusions, but he raises a lot of important issues. I would limit the discussion to systemically important financial institutions. My preferred solution would be to solve the "too big to fail" problem by capping the size of large financial institutions at a level at which their failure would not jepoardize the entire financial system and thereby solve the moral hazard problem created by the implicit taxpayer guarantee currently enjoyed by TBTF institutions.
If that proves politically or economically infeasible, however, I'm prepared to consider corporate governance reforms at such banks--perhaps including creating a fiduciary duty for managers of TBTF institutions running to taxpayers--as a second best solution.
