ABSTRACT
This chapter illustrates that the standard UK corporate law and governance framework – which applied to banks and other financial institutions nearly unmodified, until the introduction of a series of reforms after the 2007–2009 financial crisis – is prone to undermine financial stability. The attitude of different persons to risk is different. In the case of a known probability distribution, people can define as risk-neutral any individual who is indifferent to the risk and makes decisions based on the expected value of the outcome. It follows that the current corporate law framework does not necessarily maximise the aggregate wealth of the shareholders of all systemic financial institutions, as the attempt of each institution to maximise its profits decreases the overall expected value of the system. The causal link between shareholder empowerment and bank distress at times of crisis has recently been empirically confirmed.
