A new look at regulating bankers' remuneration

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Manuscript Type: Conceptual Research Questions/Issues: Executive remuneration, whether as a tool for resolving agency problems or as a sign of them, has been discussed in the literature for decades. The discussion, however, has been focused on non-financial firms, and bankers' remuneration, particularly in the context of corporate governance, has been overlooked until recently. However, following the financial crisis, regulators have begun intervening into banking boards' responsibilities, including remuneration. This raises numerous questions, in particular, how far the existing non-financial literature applies to banks, and if not, why and how this impacts on appropriate corporate governance in banking, and what challenges this brings? Research Findings/Insights: The paper argues that due to numerous externalities, notably the interconnectivity and systemic risk of the banking sector, a traditional approach to remuneration based on resolving the principal-agent conflict is inappropriate. Active involvement of regulators is needed to balance the short-term performance of the banking sector with the long-term needs of society. This, however, means that remuneration and corporate governance of banks is no longer an individual bank issue but is a national and probably an international phenomenon. In some cases this may require fundamental changes to the national governance structure, culture, and practices. Theoretical/Academic Implications: The analysis questions the suitability of the common idea of assessing corporate governance in banks in the same way as is done for non-financial institutions. Given that several traditional non-financial board responsibilities have been partially passed over to regulators in the banking sector, a new theoretical model of corporate governance is needed for banks. The paper examines relational contracts (echoed to some extent in stewardship, stakeholder, and network theories), and argues that these cannot be expected to be successful in the banking environment. Practitioner/Policy Implications: The paper highlights the importance of tying the corporate governance of banks with other regulatory measures employed to restrict risk taking. It also stresses the need for harmonization of corporate governance metrics for the banking sector at a national/international level.

Original languageEnglish
Pages (from-to)322-333
JournalCorporate Governance: An International Review
Volume24
Issue number3
Early online date11 Jan 2016
DOIs
Publication statusPublished - May 2016

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Circuit theory
Remuneration
Bankers
Corporate governance
Banking sector
Banking
Responsibility

Keywords

  • Banks
  • Corporate Governance
  • Executive Remuneration
  • Regulation
  • Systemic Risk

Cite this

A new look at regulating bankers' remuneration. / Zalewska, Anna.

In: Corporate Governance: An International Review, Vol. 24, No. 3, 05.2016, p. 322-333.

Research output: Contribution to journalArticle

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abstract = "Manuscript Type: Conceptual Research Questions/Issues: Executive remuneration, whether as a tool for resolving agency problems or as a sign of them, has been discussed in the literature for decades. The discussion, however, has been focused on non-financial firms, and bankers' remuneration, particularly in the context of corporate governance, has been overlooked until recently. However, following the financial crisis, regulators have begun intervening into banking boards' responsibilities, including remuneration. This raises numerous questions, in particular, how far the existing non-financial literature applies to banks, and if not, why and how this impacts on appropriate corporate governance in banking, and what challenges this brings? Research Findings/Insights: The paper argues that due to numerous externalities, notably the interconnectivity and systemic risk of the banking sector, a traditional approach to remuneration based on resolving the principal-agent conflict is inappropriate. Active involvement of regulators is needed to balance the short-term performance of the banking sector with the long-term needs of society. This, however, means that remuneration and corporate governance of banks is no longer an individual bank issue but is a national and probably an international phenomenon. In some cases this may require fundamental changes to the national governance structure, culture, and practices. Theoretical/Academic Implications: The analysis questions the suitability of the common idea of assessing corporate governance in banks in the same way as is done for non-financial institutions. Given that several traditional non-financial board responsibilities have been partially passed over to regulators in the banking sector, a new theoretical model of corporate governance is needed for banks. The paper examines relational contracts (echoed to some extent in stewardship, stakeholder, and network theories), and argues that these cannot be expected to be successful in the banking environment. Practitioner/Policy Implications: The paper highlights the importance of tying the corporate governance of banks with other regulatory measures employed to restrict risk taking. It also stresses the need for harmonization of corporate governance metrics for the banking sector at a national/international level.",
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