Should we trust banks when they sit on the board of directors?

Francesco Giavazzi (francesco.giavazzi@unibocconi.it) and Marco Battaglini

No 117, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: When financial markets are not fully developed large shareholders are an important feature of an efficient corporate governance system. Thanks to their (relative) financial strength, banks are good candidates to perform this leading role in the governance of firms. However, in the type of monitoring provided and in the strategies that they may choose, banks are affected by significant conflicts of interests: expecially when they exert power through proxy votes and they are important lenders of the firm.

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