Rangers in the Banking Forest

Now that the state has become a shareholder in three banks we are also seeing the phenomenon of state commissioners. Let’s call them Rangers. But which forest are these Rangers supposed to protect?

According to Dutch corporate law, the task of commissioners is to serve the best interests of the company. This implies that commissioners need to take all the interests of the company into consideration in their decision-making. The law does not specify how these interests should be prioritized. However, the interests of employees and suppliers are very important, as are shareholders’ interests. It could be that the state, as a shareholder, will settle for this model. This is most unlikely, though, because it has got itself into a position of a huge conflict of interests. As a shareholder the state is supposed to strive for a good return on investments to satisfy taxpayers. As a guardian of the Dutch economy the state is supposed to get the credit flow going again (possibly with a preference for certain industry sectors). As a ‘caring father’ the state wants to guarantee employment. As the ultimate provider of social security, it wants to prevent unemployment benefits having to be paid. And as a ‘lifesaver’ it wants to make sure that the banks can keep their heads above water. In other words, the State Rangers won’t behave as ordinary commissioners because they will bring these conflicts of interest into the boardroom.

This corporate governance might make sense from the government perspective but it is less sensible from a company’s perspective. The Board of Commissioners will be split between Rangers and commissioners. The fact that the Rangers have additional powers will contribute to this split. If the majority of the commissioners are in favour of a board decision, two Rangers could block this decision. Whose interests are served here: the interests of the state or of the company? The concept of corporate interest is very broad in its own right and adding the interests of the state to this would make decision-making extremely complex. It could cripple the board and essential decisions could be postponed or not taken at all. In the end the board would be even less accountable because any decisions could be justified by appealing to one of this multitude of important interests. Therefore there is a danger that because of the Rangers, accountability would decrease rather than increase. It would be better to appoint the Rangers as regular commissioners and explicitly not burden them with state interests. The state can, however, require the Rangers to sit on the remuneration committee and audit committee. That way the Rangers could keep an eye on the undesirable effects of pay policies and the transparency of reporting in particular. Another important task would be for them to monitor the bank’s risk profile. The Rangers could keep a particular eye on the extent and the reduction of the portfolio of American problem credits.

Oscar Couwenberg