The Board of Directors

Sergio Scandizzo

The risk governance framework outlined in the previous chapter makes sense only to the extent that the prevention of lower tail outcomes and the long-term viability of the firm is also the board of directors’ key objective. As we saw in Chapter 10, however, it is far from clear how directors’ fiduciary duties should be divided between shareholders and the company itself. Shareholders, who are indeed residual claimants but whose exposures may be lower overall than those of other stakeholders, may be perfectly willing – in view of the high potential profits – to take risks well beyond what other stakeholders, from staff to creditors to regulators, consider acceptable. Shareholder-elected directors, in turn, are – or at least should be –, inherently conflicted between constraining managers who are doing nothing but the shareholders’ bidding and trying to steer the bank away from dangerous cliffs. It makes little difference in this respect whether directors are independent of the firm or not, as they are all elected by the shareholders.

On the other hand, directors that represent other stakeholders with little to gain from excessive risk-taking, but who may bear the consequences of a