The Great Bank Escape

STANFORD – This year has proven to be yet another replete with futile efforts to manage the outsize grip that banks and bankers have on the world economy. The global financial system remains distorted and dangerous.

Since the 1980’s, “shareholder value” has increasingly become the focus of corporate governance. Managers and board members often receive stock-based compensation, which gives them equity ownership rights and, in turn, creates a powerful incentive to maximize the market value of their companies’ shares.

But actions taken in the name of shareholder value often benefit only those whose wealth is closely tied to the company’s profits, and may actually be harmful to many shareholders. Despite their claims that they are pursuing shareholder value, the actions of top managers, in particular, often reflect only their own interests, rather than those of shareholders who often hold the great majority of the shares.

This discrepancy can be seen clearly in the banking sector. Before 2007, banks enjoyed high returns and soaring stock prices. But excessive indebtedness and losses on the risky investments that had been made triggered the global financial crisis and led to the failure, or near-failure, of many major financial institutions.