Introduction
Corporate governance refers to the 'framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community)' [1] .For banks, corporate governance reflects a successful balancing of the many influences the bank is presented with. A balance must be achieved between the policies and constraints and the ability to make decisions which are in the best interests of the shareholders. Corporate governance and the role financial regulations play in UK has become an important policy issue. The literature does not fully address issues regarding the corporate governance, specifically that on financial institutions such as banks. However, accountability between management, board and shareholders is very important which not only helps to protect the interests of all the stakeholders involved, but also provides a clearer framework of the division of power in organizations.
Disclosure of the fact that banks in the UK received loans during the global financial crisis from the Bank of England makes the subject of corporate governance even of more importance, and more stakeholders are becoming involved in issues of strategic planning and risk management. Under these circumstances, the issues of corporate governance in UK banks are of greater importance than ever before. The core themes include the siza and composition of the board, the functions of the board, the role played by instituitional shareholders, renumeration, the risk of governance etc.
Aims and objectives
The purpose of this paper is to address in detail all the issues related to the corporate governance in UK banks. The reason for choosing this as the subject of my dissertation is because the literature fails to provide an in-depth analysis on the corporate governance of the banks in UK.
The aims and objectives include:
Address issues of secret emergency lending to institutions by the Bank of England
Crucial importance of such issues which are hidden from the stakeholders
Is the Bank of England correct when pumping money in the banks to keep them afloat
What disclosure dynamics be used under these circumstances
Shareholder views and reactions
How banks are to be governed? Is it a job of shareholders or management?
The power balance between executives and shareholders on issues of strategy, risk management and remuneration
Imperfections of free market capitalist societies
Should corporate governance cater to shareholders, or other stakeholders?
Literature Review
Secret emergency lending to banks in the time of global financial crisis or on occasions such as the collapse of the Lehman brothers should be must be disclosed to the relevant stakeholders. The instances cited in the literature where principles of corporate governance were not upheld include the lending to Northern Rock, a mortgage bank during the recent financial crisis. RBS and HBOS together received around $100billion support and the markets were not informed about it. It was revealed a year later when Lloyds banking group was launching a massive rights issue. At the time collapse of the Lehman brothers, Bank of England again injected $37billion in three banks without informing the publics.(Economist).
Researchers both in the fields of economics and law have recently sought to write on the subject of corporate governance- in order to refine the view of how the corporations should be organized and governed. Despite the general frenzy of writing on this subject, the corporate governance issues in banks have been ignored. This is ironic as bank themselves play a role in the governance of other businesses/firms. The question of whether corporate governance should address the interests of equity claimants only, or should it also addresses the problems of other stakeholders as well remains to be answered. The literature view of addressing the issues of corporate governance is not consistent as Anglo-American and Franco-German models differ widely in their perspective of corporate governance. While the former believes that shareholder value should be maximized, the latter views corporations as industrial partnerships and takes into account the longterm interests of stakeholders. The two models, i.e. Anglo-American and the Franco-German model are also not consistent in their views of the solution to the core problem of corporate governance. It is strange that the paradigms of corporate governance differ on basis of geography rather than the type of issue it addresses. (Macey and O'Hara, 2003)
The literature has also been able to identify the key drivers which have put the issue of corporate governance in key prominence in the recent years which include the collapse of businesses both in the financial and non-financial sectors, a greater inclination towards the safeguarding of assets, the shift in share ownership patterns, greater concentration of shareownership in the hands of instituitional investors, the diversification of portfolios and investing abroad. The literature also highlights how advances in ICT aid in disseminating information, and reliable corporate governance instills confidence in the stock market and makes the environment lucrative e for investors. Mallin (1994) identiï¬ed a framework within which corporate governance was developing in the UK. She described this as a triangle of corporate governance influences with the apexes being the institutional investors and their representative bodies, the Cadbury Committee recommendations and the London Stock Exchange as the regulatory element. An update of this triangularization would include the Combined Code( Wihlborg et al.2005)
Conclusions
Some conclusions that can be offered at this stage include:
Addressing the issues of both equity-claimants and non equity-claimants
Payments to shareholders made only when the after-payment situation will be liquid enough that corporation is able to pay off its debt in due course of time
Disclosure be done in situation where it will impair the ability of the instituition to pay its debt, will increase the riskiness of the bank which is measured by the variance in returns on banks' investment and where it would significantly reduce a bank's capital position as measured by risk based calculation and leverage
The directors should be aware of such crucial activities and inquiries should be made if they are not
A concrete framework of monitoring should be an inherent part of a bank's structure which could access any risks well in time and has contingency plans
Stakeholders/creditors should have the right to sue bank directors in cases of non-conformance and violation of the governance
Strengthening of bank borads
The instituitional shareholders should be encouraged to play a greater role
Research Methodology
For this research, a triangular approach will be employed that takes into account both qualitative and quantitative findings. The method is helpful in validating research outcomes as a multitude of data collection techniques are used. For qualitative part, data will be gathered from secondary sources like banks' official documents and prior researches being carried out for analyzing the corporate governance in banks.
For primary data collection, interviews sessions will be conducted with the bank managers to gain an in depth investigation of the corporate governance phenomenon with respect to the particular banks in focus. Afterwards questionnaires will be used that constitute the quantitative aspect of research process. Data will be gathered by purposive sampling as 10 managers will be selected from the following bank branches operating in London:
- Bank of England
- Lloyds TBS
- Barclays Plc
By administering questionnaires to the managers of the three selected banks, the response rate of questionnaires can be tallied with interview results for proper data interpretation.
Data will be analyzed with the help of descriptive statistics. Tabular and graphical representation of research findings will be illustrated for reader's convenience.
