Fiduciary duty, Systemic risk, SIFI governance
Banking and Finance Law
The global financial crisis of 2008-2009 has sharply reframed the debate on the role of bank corporate governance as a mechanism of systemic crisis prevention. Among other things, it revealed how often the incentives of bank managers and shareholders to maximize short-term private gains are perfectly aligned as a matter of internal governance, but work directly against the broader public interest in preserving long-term financial stability. This Article accepts the existence of that built-in potential conflict as the critical starting point for answering the central question of post-crisis bank governance: How do we ensure that the board of directors of a privately-owned banking institution consistently and effectively acts in a manner that serves the overarching public interest in preventing systemic financial crises?
The Article offers an unorthodox solution to this problem: in lieu of “improving” or “tweaking” existing standards and procedures that determine board composition or guide specific board actions, it advocates a fundamental structural reconfiguration of bank governance. Specifically, the Article proposes a special “golden share” regime that would grant direct but conditional management rights to a designated government representative on the board of each systemically important banking organization. The goal of the proposed regime is to create a powerful organizational node of public-interest-driven management, which would operate as a dynamic and flexible internal “emergency brake” on individual banks’ activities presenting significant systemic stability concerns. In effect, this mechanism would enable the federal government to accept the role of the “manager of last resort” of a systemically significant financial firm—but only temporarily, and only when it is necessary to preempt or reverse emerging threats to the financial system’s continuing operation.
Importantly, the proposed regime is neither a nationalization measure nor an institutionalized bank bailout. Its overarching purpose is not to put the government in charge of private firms but, on the contrary, to steer the firms toward self-correcting and preventative actions necessary to avoid that undesirable result. In that sense, the golden share regime operationalizes a novel approach to bank—and, more broadly, systemically important financial institution (“SIFI”)—corporate governance as an inherently hybrid public–private process.
Omarova, Saule T., "Bank Governance and Systemic Stability: The 'Golden Share' Approach," 68 Alabama Law Review 1029 (2017)