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6 - Regulating Agency Relationships and Risk Culture in Financial Institutions

from Part II - A View of Risk Culture Concepts in Firms and Society

Published online by Cambridge University Press:  22 May 2020

By
Kern Alexander
Edited by
Michelle Tuveson ,
Daniel Ralph  and
Kern Alexander
Michelle Tuveson
Affiliation:
Judge Business School, Cambridge
Daniel Ralph
Affiliation:
Judge Business School, Cambridge
Kern Alexander
Affiliation:
Universität Zürich
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Summary

The chapter analyses the role of financial regulation in facilitating the development of organizational norms to enhance risk culture in financial institutions. The paper suggests that shortcomings in risk culture – particularly as understood through the lens of human agency theory – in large financial institutions are the result of collective agency problems. The paper argues that regulation has a role to play in addressing collective agency problems but that regulators should be selective in what tools they use to enhance risk culture in institutions with consideration given to the regulation of remuneration and trusted financial products. It further suggests that to address collective agency problems in large financial institutions policymakers should consider the utility of a senior managers’ liability regime to incentivize senior officers and board directors to be more proactive and aware of misconduct and other behavior that results in agency costs for the firm and society. The paper concludes that a effective regulation involves a balance between official sector regulation and self-regulation that can channel the collective actions of individuals to improve governance and operations in a way that benefits overall firm performance and which mitigates socially costly behavior.

Type
Chapter
Information
Beyond Bad Apples
Risk Culture in Business
 , pp. 165 - 189
Publisher: Cambridge University Press
Print publication year: 2020

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