The Market Revolution in Bank and Insurance Firm Governance: Its Logic and Limits

Abstract

This article addresses the question whether the recent changes in bank and insurance firm governance suggest that U.S. financial firm governance will soon replicate the governance of nonfinancial firms. In addressing this question, the Article starts from the assumption that we must consider both corporate governance and the background insolvency procedures to fully appreciate the overall governance framework. In particular, the relationship between corporate governance and insolvency tends to be complementary. The governance of nonfinancial U.S. firms, for instance, relies on ex post correctives such as takeovers to address the conflicts of interest between managers and widely scattered shareholders; and if the firm fails, offers a manager-driven reorganization option. In other nations, such as Germany and Japan, banks and other large investors actively participate in corporate governance; bankruptcy is characterized by immediate displacement of managers and liquidation of the firm. I describe U.S. governance as an "ex post" framework, and the German and Japanese alternative as an "ex ante" approach.