Bank Governance and Sustainability

doi:10.1017/9781009483971.009

6 - Bank Governance and Sustainability

from Part II - Ethics and Sustainability in Corporate Law, Corporate Governance and Conduct

Published online by Cambridge University Press: 30 January 2025

Kern Alexander

Edited by

Kern Alexander ,

Matteo Gargantini and

Michele Siri

Show author details

Kern Alexander: Affiliation:
University of Zurich
Matteo Gargantini: Affiliation:
University of Genoa
Michele Siri: Affiliation:
University of Genoa

Book contents

Get access

Summary

This chapter discusses the importance of decision-making and agency problems in bank governance with particular focus on the role of the board of directors in addressing sustainability risks that are increasingly affecting the banking business. It considers traditional agency theories that underpin corporate governance and suggests that they do not offer a full explanation of the ‘collective’ agency problems that exist in large complex organisations, such as banks and other financial institutions. Human agency theory offers an alternative theory that emphasises the importance of organisational culture in determining standards, norms and values that influence agent behaviour. As to bank boards, the chapter stresses that although their role is primary, regulatory intervention may be necessary to ensure that organisational practices are adequately managing agency problems regarding sustainability concerns. The chapter concludes with some recommendations for how bank governance and business practices could be improved to support society’s sustainability objectives.

Keywords

bank corporate governance human agency theory risk culture moral hazard adverse selection collective agency stewardship codes risk culture reputational risks

Information

Type: Chapter
Information: The Cambridge Handbook of EU Sustainable Finance
Regulation, Supervision and Governance
, pp. 134 - 153

DOI: https://doi.org/10.1017/9781009483971.009 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2025

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Book purchase

Temporarily unavailable

References

Alexander, K. (2016), ‘Greening Banking Policy’, Input paper in support of the G20 Green Finance Study Group ‘Greening Banking Policy’, September 2016, (Geneva: United Nations Environmental Programme), available at: https://tinyurl.com/5n7f5jwt [accessed 16 June 2024].Google Scholar

Alexander, K. and Fisher, P. (2018), ‘Banking Regulation and Sustainability’, SSRN Working Paper, 1–17, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3299351 [accessed 16 June 2024].10.2139/ssrn.3299351CrossRef Google Scholar

Alexander, K. and Fisher, P. (2019) ‘What happens when nobody is watching: Regulation, bank risk culture and environmental sustainability’, in Taaffe, O. (ed.), Banking on Change: The Development and Future of Financial Services (Chichester: Wiley), 27–42.CrossRef Google Scholar

Alexander, K., Dhumale, R. and Eatwell, J. (2006), Global Governance of Financial Systems: The International Regulation of Systemic Risk (Oxford: Oxford University Press).Google Scholar

Alvesson, M. and Robertson, M. (2016), ‘Money matters: Teflonic identity manoeuvring in the investment banking sector’, Organization Studies, 37(1), 7–34.CrossRef Google Scholar

Arrow, K. (1965), Aspects of the Theory of Risk-Bearing (Chicago, IL: Aldine-Atherton).Google Scholar

Ashby, S., Palermo, T. and Power, M. (2014), ‘Risk culture: Definitions, change practices and challenge for chief risk officers’, in Jackson, P. (ed.), Risk Culture Effective Risk Governance (London: Risk Books), 25–46.Google Scholar

Bandura, A. (1997), Self-efficacy: The Exercise of Control (New York: W H Freeman).Google Scholar

Bandura, A. (1999), ‘Social cognitive theory of personality’, in Pervin, L. A. and O. P. John (eds.), Handbook of Personality (New York and London: The Guildford Press).Google Scholar

Bank of England (2018), ‘Transition in Thinking: The Impact of Climate Change on the UK Banking Sector’, available at: https://tinyurl.com/5n8en63z [accessed 16 June 2024].Google Scholar

Bank of England, Prudential Regulatory Authority (PRA) (2014), ‘The Use of PRA Powers to Address Serious Failings in the Culture of Firms’, available at: https://tinyurl.com/ykm4abp9 [accessed 16 June 2024].Google Scholar

BCBS (Basel Committee on Banking Supervision) (2009), ‘Enhancements to the Basel II Framework’, available at: www.bis.org/publ/bcbs157.htm [accessed 19 April 2017].Google Scholar

BCBS (Basel Committee on Banking Supervision) (2014), ‘Consultative Document: Corporate Governance Principles for Banks’, available at: www.bis.org/publ/bcbs294.pdf [accessed 10 January 2019].Google Scholar

BCBS (Basel Committee on BankingSupervision) (2022), ‘Principles of Supervisory Review for Climate Change Risks’, available at: www.bis.org/bfcbs/publ/d532.htm [accessed 16 June 2024].Google Scholar

Bilz, K. and Nadler, J. (2014), ‘Law, moral attitudes, and behavioral change’, in Zamir, E and Teichman, D. (eds.), The Oxford Handbook of Behavioral Economics and the Law (Oxford: Oxford University Press), 241–267.Google Scholar

Bryant, Q. C. and Rickards, J. (2016) The Legal Duties of Pension Fund Trustees in Relation to Climate Change, Abridged Joint Opinion (London: ClientEarth).Google Scholar

Buranyi, S. (2018), ‘The plastic backlash: What’s behind our sudden rage – And will it make a difference?’, The Guardian, 13 November, available at: https://tinyurl.com/2fjyzkku [accessed 16 June 2024].Google Scholar

Carney, M. (2015), ‘Breaking the tragedy of the horizon – Climate change and financial stability’, speech to Lloyd’s of London, September, available at: https://bit.ly/4bFW54t [accessed 17 June 2024].Google Scholar

Center for Sustainability Studies, Federação Brasileira de Bancos (Febraban) (Sept. 2014), ‘The Brazilian Financial System and the Green Economy: Alignment with Sustainable Development’, (United Nations Environment Programme, Geneva), available at: https://tinyurl.com/mpja7h3 [accessed 17 June 2024].Google Scholar

Cole, D. H. and Ostrom, E. (2011) ‘The variety of property systems and rights in natural resources’, in Cole, D. H and Ostrom, E (eds.), Property in Land and Other Resources (Cambridge, MA: Lincoln Institute of Land Policy), 37–66.Google Scholar

DNB (De Nederlandsche Bank) (2017) 2016 Annual Report, available at: www.dnb.nl/media/vxum0etl/2016-anual-report.pdf [accessed 16 June 2024].Google Scholar

Dow, J. (2000), What Is Systemic Risk? Moral Hazard, Initial Shocks, and Propagation. Institute for Monetary and Economic Studies, Bank of Japan.Google Scholar

Emirbayer, M. and Mische, A. (1998), ‘What is agency’, The American Journal of Sociology, 103(4), 962–1023.10.1086/231294CrossRef Google Scholar

European Banking Authority (2021), Report on the Management of ESG Risks, available at: https://tinyurl.com/yd75h3cw [accessed 17 June 2024].Google Scholar

European Central Bank (2020), Final Guidance on Climate-related and Environmental Risks, available at: https://tinyurl.com/bdhtjc3b [accessed 16 June 2024].Google Scholar

European Commission (2013), Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJEU L 176/338, Recital 54.Google Scholar

European Commission (2018), High-Level Expert Group on Sustainable Finance (Final Report), available at https://tinyurl.com/36rv2kv3 [accessed 24 January 2019].Google Scholar

EY (2014), Shifting Focus: Risk Culture at the Forefront of Banking, available at: https://go.ey.com/3I6Gqhe [accessed 19 January 2019].Google Scholar

Financial Stability Board (2014), ‘Guidance on Supervisory Interaction with Financial Institutions on Risk Culture: A Framework for Assessing Risk Culture’, available at: www.fsb.org/wp-content/uploads/140407.pdf?page_moved=1 [accessed 10 January 2019].Google Scholar

G30 (2013), ‘A New Paradigm: Financial Institution Boards and Supervisors’, available at: https://bit.ly/3T3zHe3 [accessed 19 June 2022].Google Scholar

Hart, O. (1995), Firms, Contracts, and Financial Structure (New York: Oxford University Press, USA).CrossRef Google Scholar

Hutley, S. C. and Hartford Davies, S. (2016), ‘Climate Change and Directors’ Duties’, Memorandum of Opinion published by The Centre for Policy Development and the Future Business Council via Minter Ellison, Solicitors, Melbourne. https://tinyurl.com/4tyww2wm [accessed 16 June 2024].Google Scholar

Institute of International Finance (IIF) (2009), Reform in the Financial Services Industry: Strengthening Practices for a More Stable System (Washington, DC: IIF).Google Scholar

Jensen, M. C. (1998), Foundations of Organizational Strategy (Cambridge, MA: Harvard University Press).Google Scholar

Jensen, M. C. and Meckling, W. H. (1976), ‘Theory of the firm: Managerial behavior, agency costs, and ownership structure’, Journal of Financial Economics, 3(4), 305–360.10.1016/0304-405X(76)90026-XCrossRef Google Scholar

Jensen, M. C. and Meckling, W. H. (1994), ‘The nature of man’, Journal of Applied Corporate Finance, 7(2), 4–19.10.1111/j.1745-6622.1994.tb00401.xCrossRef Google Scholar

Khurana, R. (2002), ‘Market triads: A theoretical and empirical analysis of market intermediation’, Journal for The Theory of Social Behaviour, 32(2), 239–262.10.1111/1468-5914.00185CrossRef Google Scholar

Mahmendier, U. and Geofrrey, T. (2009), ‘Superstar CEOs’, The Quarterly Journal of Economics, 124(4), 1593–1638.CrossRef Google Scholar

Prudential Regulation Authority (2018), ‘Enhancing Banks’ and Insurers’ Approaches to Managing the Financial Risks from Climate Change’, consultation paper 23/18, available at: https://bit.ly/3OQSmap [accessed 24 January 2019].Google Scholar

Robertson, J. (2017), ‘Big Four banks distance themselves from Adani Coalmine as Westpac rules out loan’, The Guardian, 28 April, available at: https://tinyurl.com/3kw3dv5u [accessed 16 June 2024].Google Scholar

Sants, H. W. H. (2010), ‘Do regulators have a role to play in judging culture and ethics?’ Speech at the Chartered Institute of Securities and Investments Conference, available at: https://bit.ly/3ONX5K4 [accessed 17 June 2024].Google Scholar

Shleifer, A. and Vishny, R. (1997), ‘A survey of corporate governance’, Journal of Finance, 2, 737–783.CrossRef Google Scholar

Tversky, A. and Daniel, K. (1974), ‘Judgment under uncertainty: Heuristics and biases’, Science, New Series, 185(4157), 1124–1131.Google Scholar PubMed

United Nations (2015), ‘About the Sustainable Development Goals’, available at: https://bit.ly/3T3bcgZ [accessed 25 January 2019].Google Scholar

World Economic Forum (2020), Measuring Stakeholder Capitalism, Towards Common Metrics and Consistent Reporting of Sustainable Value Creation, September, Pilar: Principles of Governance.Google Scholar

Accessibility standard: Unknown

Why this information is here

This section outlines the accessibility features of this content - including support for screen readers, full keyboard navigation and high-contrast display options. This may not be relevant for you.

Accessibility Information

Accessibility compliance for the HTML of this chapter is currently unknown and may be updated in the future.