Corporate Governance Reform in a Time of Crisis

Abstract

In this article I argue that crisis-driven corporate governance reform efforts in the United States and the United Kingdom that aim to empower shareholders are misguided, and offer an explanation of why policymakers in each country have reacted to the financial crisis as they have. I first discuss the risk incentives of shareholders and managers in financial firms, and examine how excessive leverage and risk-taking in pursuit of short-term returns for shareholders led to the crisis. I then describe the far greater power and centrality that U.K. shareholders have historically possessed relative to their U.S. counterparts, and explore historical and cultural factors explaining this distinction - notably that the more robust U.K. welfare state has deflected political pressure to accommodate non-shareholders' interests within the corporate governance system, while the opposite has occurred in the United States. This, I argue, looms large in the observed crisis responses. The U.K. initiatives reflect reinforcement of the more shareholder-centric status quo, while the U.S. initiatives reflect a populist backlash against managers, fueled by middle class anger and fear in a far less stable social welfare environment. I conclude with a discussion of corporate governance challenges facing U.S. and U.K. policymakers following the crisis.