The UK bank corporate governance framework : a holistic and critical analysis with a focus upon bank risk and executive remuneration governance

• Main Author: Wu, Hong
• Other Authors: Griffiths, Andrew; Birds, John
• Published: University of Manchester 2012
• Subjects: 332.1
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.568573

This thesis is the first piece of legal academic research that takes a holistic approach to the bank corporate governance framework in the UK, with a critical analysis of each key component of the governance framework. Its research questions are twofold: what are the key problems of the UK bank governance framework and how to improve it? Although “black letter” law analysis is at the core of the methodological approach of this thesis, the analysis draws extensively upon the bank-governance-related findings of the literature of economics, finance, management, accounting and psychology. Moreover, modest use of historical and empirical analytical tools is attempted. This thesis comprises five chapters. Chapter One (the adapted principal-agent theory and bank governance, a historical account of UK bank corporate governance, and the FSA’s regulatory system in respect of bank corporate governance) and Chapter Two (an experimental empirical study on enforcement mechanisms in UK bank corporate governance) set the general backdrop, against which the UK framework for bank executive remuneration governance (Chapter Three) and the UK framework for bank risk governance (Chapter Four) are holistically discussed and critically analysed. Chapter Five makes the following conclusions: (1) This thesis, based on Professor Heremans’ work, redefines agency problems in banks with dispersed shareholders to comprise two-tier agency problems and the agency problems between the regulator and the regulated. This theoretical framework has been extensively used in the analysis of this thesis.(2) None of the distinct but interlinked governance mechanisms of the UK bank governance framework are a panacea and risk-free. Each governance mechanism is beset by its own obstacles and limits, hence no single governance mechanism can function effectively alone. The UK bank governance framework should fully recognise the limitations of each governance mechanism and eradicate any false sense of confidence. It would be inaccurate to describe them as substitutes for each other. (3) Agency problems affect the effectiveness of and the interaction between governance mechanisms. Equity governance mechanisms in the form of self-regulation cannot address debt governance problems and financial stability concerns alone without regulatory intervention. Further, some of the equity governance mechanisms may have a negative impact upon debt governance. The thesis thus concludes that various governance mechanisms must all work together efficiently and consistently if a UK bank’s governance matrix is to be robust and the objectives of a proper UK bank governance framework are to be met.(4) The effectiveness of the framework, in particular from the perspective of risk governance and executive remuneration governance, calls for a number of factors to be observed.(5) An inherent limitation of the UK bank governance framework is that it is not, and cannot be, designed to address possible black swan phenomena. The framework should be, and is, to a large extent, designed to effectively discourage and prevent bank boards and senior management from building exposures to or, continuing with, known ill-considered or inadequately controlled risk and to effectively encourage them to incorporate foreseeable systemic risk into their bank’s risk appetite/risk tolerance.