How the Strong Negotiating Position of Wall Street Employees Impacts the Corporate Governance of Financial Firms
Virginia Law & Business Review, Volume 5, No. 3, Winter 2011
27 Pages Posted: 9 Dec 2009 Last revised: 15 Feb 2011
Date Written: February 13, 2011
Abstract
Several prominent figures in the field of corporate governance have put the blame for the financial crisis of 2008 squarely on the shoulders of greedy shareholders. Moreover, they argued that the financial crisis of 2008 was the result of directors and managers of financial firms focusing too strongly on the short-term interests of its shareholders. If so, the financial crisis can be understood as a corporate governance failure relating to a pernicious form of shareholder primacy.
Yet, how can that argument be reconciled with the behavior of Wall Street firms in regard to the large bonus payments it made to its employees in the years just prior to and during the financial crisis, a time when financial and economic conditions were clearly deteriorating? A better argument, at least for Wall Street firms such as Bear Stearns, Merrill Lynch and Lehman Brothers and other financial sector firms where asset management, trading and investment banking was a significant source of firm profitability, is that it was not an overzealous desire to meet the short-term demands of shareholders that was at work in the corporate governance of these firms, but the need to accommodate strongly positioned non-shareholder parties such as traders, investment bankers and asset managers (Wall Street employees), parties who acquired their strong negotiating position by possessing the critical assets needed by their respective firms, who did not need to make firm-specific investments and whose skills were highly valued by competing firms.
The implications of this argument are significant for Wall Street firms and other financial firms where Wall Street employees provide a significant source of firm profitability. First, the gap filling role of shareholder primacy can be understood as being crowded out by the economic terms demanded by those employees who have strong bargaining power. Second, shareholder empowerment proposals implemented to enhance board accountability such as say-on-pay, annual election of directors and shareholder nomination of directors may result in negatively affecting shareholder wealth. Finally, shareholder lawsuits seeking compensation from directors and executive management for wrongs perceived to have resulted from a lack of attention to shareholder interests may be unwarranted.
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