A New Look at Regulating Bankers’ Remuneration

• Date: 01 May 2016
• Author: Anna Zalewska
• Published date: 01 May 2016
• DOI: http://doi.org/10.1111/corg.12149

A New Look at Regulating Bankers’Remuneration

Anna Zalewska*

ABSTRACT

Manuscript Type: Conceptual

Research Questions/Issues: Executive remuneration, whetheras a tool for resolving agency problems oras 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 financialcrisis, 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 conflictis 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, meansthat remunerationand corporate governance of banks is nolonger an individual bankissue 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 gover-

nance 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/P olicy Implication s: 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 corporategovernance met-

rics for the banking sector at a national/international level.

Keywords: Corporate Governance, Executive Remuneration, Banks, Regulation, Systemic Risk

INTRODUCTION

According to principal-agent theory, the separation of

ownership andcontrol is the starting point for thedebate

on how to mitigate theproblems that arise because principals

and agents hired by them may have different objectives, and

that the principalsdo not fully observe the actionsundertaken

by agents. Consequently, how to minimize differences in

objectives, how to limit asymmetries of information between

agents and principals,and how to minimize their effects have

become key strands of the corporate governance literature.

The alignment of interests by making agents equity focused

is one of most commonly postulated solutions. Conse-

quently, a vast literature is devoted to discussing existing

and optimal remuneration structures of top-tier manage-

ment and CEOs. Many papers are written on whether remu-

neration practices ensure that shareholders’value has been

maximized (for an overview, see Frydman & Jenter 2010).

Similarly, executive, and in particular, CEO’s remuneration

has frequently been a ddressed by regulators and other

policymaking bodies (e.g., US Congress, Securities and

Exchange Commission (SEC), European Commission (EC),

individual governments).

Whilst the majorityof the literature has been focusedon the

corporate governance of non-financial companies, the 2008

financial crisishas brought the financial sector and,in particu-

lar, banks into the spotlight.It became apparent that there is a

gap in the literatureand potentially also in regulation,on who

should structure remuneration in banks and what form this

should take. Pre-financial crisis codes of good practice and

regulation were cross-industrial and country-focused in na-

ture. They also were not particularly interventionist when it

came to influencing the size and form of remuneration. How-

ever, the financial crisis has revealed that, since banks and

other financial institutions do not fit into the classic picture

of agency theory, their remuneration practicesmay need more

attention. Moreover, it is not only that tighter internal gover-

nance mechanisms may need to be in place (e.g., better risk-

management practices) but also that leaving remuneration

*Address for correspondence: Anna Zalewska, School of Management, University of

Bath, BathBA2 7AY, UK. Tel: +44 01225384354; E-mail: a.zalewska@bath.ac.uk

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12149

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Corporate Governance: An International Review, 2016, 24(3): 322–333