The failure of corporate governance and the limits of law: British banks and the global financial crisis

Abstract

The Global Financial Crisis of 2007-2008 has demonstrated the fragility of prevailing corporate governance ideas and the weakness of legal means of minimizing risk and highlighting dangers in major banking corporations. Gatekeeper failure has undoubtedly been a significant contributor to this situation and suggests that efforts need to be made to strengthen the monitoring capacity of corporate gatekeepers and stakeholders. This paper looks closely at the factors that contributed to the failure of the British Bank, Northern Rock plc; like the collapse of Lehman Brothers in the USA, the failure of Northern Rock was a pivotal event in the UK during the crisis as it for the first time focused closer government and private sector attention on the poor risk models used by banks. This ultimately led to the passage of new Banking legislation in the UK and to the redrafting of the UK Code of Corporate Governance. Most importantly, the case has demonstrated the poor state of legal tools and remedies that were available to stakeholders such as shareholders, directors and government regulators charged with monitoring and controlling large financial institutions. Uncritical adherence to market based ideologies which see financial markets as self-correcting was also a major explanation for the failure of the UK to build stronger structures of financial regulation both within and outside the corporation.