The Failure of Bank Board Governance

Raj Date and Holly Scott Atallah

The Cambridge Winter Center for Financial Institutions Policy is pleased to present this research note in conjunction with its ongoing research program on banks’ regulation and governance.

Over the course of the last several months, global financial regulators have signaled their intent to reduce systemic risk by limiting individual banks’ discretion.  For example, regulators in both the U.S. and abroad have focused on the need for higher capital requirements, and for more disciplined executive compensation schemes.   In general, these new constraints would necessarily reduce the level of free-market discretion traditionally afforded to private sector banks’ boards of directors.

At the same time, two large banks that received significant taxpayer assistance -- Citigroup and Bank of America -- have, presumably through some manner of regulatory encouragement, undertaken a profound re-shaping of their boards of directors.

This research note is meant to inform debate on the need for such new constraints on board discretion and composition, by examining more closely the putative failure of bank board governance.  In particular, it focuses on (a) evaluating the performance of banks’ boards of directors during the build-up to the financial crisis; (b) identifying the likely causes of that performance; and (c) highlighting implications for policy-makers.