Managerial Safety and Soundness and Maximization of Shareholder Interests: Sifting Through Bifurcated Governance Strands over Managerial Conduct of United States Banking Organizations

Abstract

The recent trend reflecting the erosion of the traditional boundaries between banking and other financial businesses by virtue of financial deregulation and liberalization has resulted in a more complex and dynamic risk-profile for banking institutions. One upshot of this transformation is, whilst promoting safe and sound banking still remains the overriding hank regulatory objective, the focal point shifts more and more to managerial function and responsibility, a subject traditionally more generally associated with the corporate-law domain but now being recognized as a core subject-matter for banking regulation and supervision. This text will analyze the subject of managerial function and responsibility in the context of United States banking institutions, specifically the national hank, the bank holding company and the financial holding company. The primary thesis to be presented and supported is in banking the governance order concerning the "control and direction" mechanism over managerial conduct can only be fully appreciated by not only looking into the economy specific dimension, as informed primarily by applicable corporate law standards addressed generally to and among the shareholder, the board and the senior management as they interact with the corporate entity, but also by investigating the industry specific dimension (in the instant case as to banking institutions), as reflected by required regulatory standards enshrined in statutes, regulations and other regulatory pronunciations addressed specifically to their industrial particularities and their derived implications on the society as whole. In the context of the United States, the governance order of banking institutions, as such, is placed in the applicable (i) state law corporate governance framework tinder the Delaware General Corporate Law and related Delaware case law and (ii) federal statutes and the prudential regulations and practices of federal banking regulators. As will be seen, these two regulatory strands that impact the U. S. hank governance order have separately evolved tinder separate statutory and regulatory frameworks with separate policy underpinnings. Traditionally, banks as corporate entities have been treated under general corporate governance principles developed under corporate statutes and case law. For lcdcral banking institutions, the federal regulators have generally deferred to the fiduciary standards under Delaware corporate law. The policy of the Delaware statute and case law directs corporate directors and officers towards maximizing corporate value fier the shareholders: the law recognizes that corporate management is engaged in business risk-taking and grants corporate management considerable leeway as to their good-faith decisions and activities, while placing constraints on grossly negligent, illegal, had taith and sell-dealing decisions and activities. The U. S. federal bank regulators' primarily are concerned with the "satcty and soundness" of' banking institutions and the stability of the U. S. banking system. In pursuing the prudential objective, the U. S. Congress and these bank regulators have externally imposed numerous regulatory requirements on bank management, backed by intensive supervision and vigorous enforcement. This text will argue that these federal banking laws and regulations have significantly intruded- in depth and in breadth- into the traditional state law domain of corporate governance of banking institutions, and, as a result of which, the ensuing contusion and inconsistence in governance standards to be addressed. This intrusion refers to a stand-alone bank, as well as a bank held by a corporate parent. An appreciation of this "push and pull" tension between these two bifurcated strands influencing the governance structure facing bank management is critical as management plans its prudent profit-seeking strategies. Whilst a needed, comprehensive reform able to bring about a set of uniform and industry-specific governance standards is outside the scope of this work, this text will consider possible ways to reconcile conflicts generated and will make some modest recommendations in this connection as conclusions thereof.