IMPROVING FINANCIAL INSTITUTION CORPORATE GOVERNANCE: LESSONS FROM INVESTOR ACTIVISM

Abstract

The global financial crisis of 2007-8 revealed poor corporate governance practices at many systemically important financial institutions. This thesis considers whether activist investors can successfully target and implement improvements in corporate governance in financial institutions. It also considers various barriers that may prevent activists from targeting large financial institutions. The thesis begins by showing how poor corporate governance resulted in excessive risk-taking and poor risk management in financial institutions leading up to the financial crisis. Second, the thesis reviews the literature concerning the effects of investor activism on long-run target company performance to determine that activists can in fact positively impact corporate governance at target companies. Third, the thesis discusses the reasons supplied by interviewed activists for their reluctance to target financial institutions, concluding that financial institution complexity and the many relationships between financial institutions and activist investors to be among the most important. Fourth, the thesis examines the issues preventing the restoration of shareholder democracy in large publicly traded corporations, finding the Delaware Chancery Court’s business judgment rule and shareholders’ lack of proxy access at fault. Fifth, the thesis demonstrates that implicit guarantees to financial institutions, such as federal deposit insurance, enhance financial institutions’ appetite for risk. The thesis’ findings demonstrate that policymakers should promote rather than suppress the actions of activist investors if they want better corporate governance at financial institutions.