David Min


Part I briefly describes the traditional agency–cost approach to corporate governance and the rationale that is offered for elevating the agency–cost concerns of shareholders over those of other stakeholders (especially creditors). But as Part I goes on to argue, even if this justification for shareholder primacy is convincing in corporate governance generally (and there are many who do not find it so), several unique characteristics of banks obviate the reasoning behind shareholder primacy. Banks are highly leveraged, which exacerbates creditor–shareholder agency conflicts and places greater importance on the interests of creditors. Banks enjoy government guarantees, and thus their corporate governance (and allocation of gains and losses) is not merely a matter of private ordering, but one that implicates the public interest. And bank failures create massive negative social and economic costs not borne by bank investors, providing another key basis for rejecting shareholder primacy in bank governance. Part II provides an overview of the potential solutions for bank governance and argues that a realignment of bank governance priorities—specifically, deemphasizing shareholder primacy and expressly recognizing creditor interests—is likely to be most promising. Part II also briefly reviews the possibility of using existing laws—specifically, longstanding “commitment statutes” and the relatively recent phenomenon of statutes authorizing “benefit corporations”—as a means to help reorder bank governance.