Aligning National Bank Priorities with the Public Interest: National Benefit Banks and a New Stakeholder Approach

• Published date: 01 March 2021
• Author: Lindsay Sain Jones
• Date: 01 March 2021
• DOI: http://doi.org/10.1111/ablj.12178

American Business Law Journal

Volume 58, Issue 1, 5–61, Spring 2021

Aligning National Bank Priorities

with the Public Interest: National

Benefit Banks and a New

Stakeholder Approach

Lindsay Sain Jones*

Banks have particular characteristics that set them apart from other business

entities, including being more highly leveraged, benefiting from government

safety nets, and generating massive negative externalities when they fail. These

attributes mean that in addition to shareholder interests, bank directors should

be allowed to carefully consider the interests of nonshareholders, such as credi-

tors, taxpayers, and the overall economy, when making decisions. While direc-

tors of banks in states that have enacted constituency statutes may be allowed to

consider nonshareholder interests, no federal act expressly allows directors of

federally chartered banks to consider such interests. Moreover, to date, thirty-

seven states have enacted legislation to allow for the formation of public benefit

corporations that require directors to consider the interests of nonshareholders.

No federal law provides a clear path for federally chartered banks to do this.

This article proposes dual federal legislation that would (1) enable directors of

all federally chartered banks to expressly consider nonshareholder constituents

when making decisions and (2) allow for the formation of national benefit

banks that would require directors to consider nonshareholder interests in their

decision-making.

*Assistant Professor of Legal Studies, Terry College of Business, University of Georgia. This

article benefited from feedback from attendees of the 2019 Academy of Legal Studies in

Business conference in Montreal, Canada. I would like to particularly acknowledge Robert

Bird, Dale Thompson, Jeremy Kress, and Greg Day for their insightful comments and feed-

back on earlier drafts of the article. I also thank the reviewers and the editorial board of the

American Business Law Journal.

©2021 The Author

American Business Law Journal ©2021 Academy of Legal Studies in Business

5

INTRODUCTION

To curb the spread of the coronavirus, most governors initially issued

stay-at-home orders and have continued to impose social distancing mea-

sures as states have reopened.

1

As a result, life has abruptly changed for

most Americans. Many companies have been forced to reduce operations

or to shut down completely, and millions of Americans have lost their

jobs.

2

Early in the resulting financial crisis, banks across the country

began to offer assistance to their customers in the form of payment

deferrals and fee waivers.

3

Providing customers with such support not only benefits the individ-

uals who are able to stay in their homes while recovering financially, but

also prevents the destabilizing effects of mass foreclosures. Quick imple-

mentation of these assistance measures revealed a marked change from

actions taken during the last financial crisis in 2008, when banks and

other financial institutions foreclosed on homes at a record pace and

scale.

4

The current support initiatives are also aligned with the “funda-

mental commitment”to all stakeholders pledged by chairmen and CEOs

of some of the largest U.S. banks in 2019.

5

1

State Data and Policy Actions to Address Coronavirus,KAISER FAM.FOUND., https://www.kff.org/

coronavirus-covid-19/issue-brief/state-data-and-policy-actions-to-address-coronavirus/ (last

visited Sept. 25, 2020).

2

See Eric Morath, How Many U.S. Workers Have Lost Jobs During Coronavirus Pandemic? There

Are Several Ways to Count,W

ALL ST.J. (June 3, 2020), https://www.wsj.com/articles/how-many-

u-s-workers-have-lost-jobs-during-coronavirus-pandemic-there-are-several-ways-to-count-

11591176601 (reporting that “data suggest layoffs might have topped 40 million, while

another count shows only about 20 million are tapping unemployment benefits”).

3

See America’s Banks Are Here to Help,AM.BANKERS ASS’N, https://www.aba.com/about-us/

press-room/industry-response-coronavirus (last visited July 15, 2020) (providing a list of

programs offered by banks to assist customers affected by the pandemic).

4

In 2009, 2.2% of houses, or one out of forty-five, received at least one foreclosure filing.

FIN.CRISIS INQUIRY COMM’N,THE FINANCIAL CRISIS INQUIRY REPORT:FINAL REPORT OF THE

NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED

STATES 402 (2011) [hereinafter FINANCIAL CRISIS INQUIRY]. Historically, the foreclosure rate

was less than one percent. Id.

5

David Benoit, Move Over, Shareholders: Top CEOs Say Companies Have Obligations to Society,

WALL ST. J. (Aug. 19, 2019), https://www.wsj.com/articles/business-roundtable-steps-back-

from-milton-friedman-theory-11566205200.

6Vol. 58 / American Business Law Journal

However, these initiatives raise a question about whether such actions

could be successfully challenged as a violation of the directors’duties to

shareholders. In spite of changing attitudes about the purpose of a

corporation,

6

Delaware, the state whose corporate laws direct the gover-

nance procedures of the majority of national banks,

7

has remained in the

minority of states that has held fast to shareholder primacy.

8

Similarly,

the federal Office of the Comptroller of the Currency (OCC) affirms

shareholder primacy based on common law fiduciary duties in its publi-

cation for directors of national banks.

9

Such a narrow view of corporate

purpose applied in the banking context contributed to the last financial

crisis.

Failures in bank governance and risk management have been identi-

fied as some of the key causes of the 2008 financial crisis.

10

Leading up

to the crisis, several bank directors neglected to rein in managers who

made increasingly risky investments, in part because the investments

were yielding unprecedented profits to bank shareholders. When the

bets failed to pay off, more than just shareholders suffered—creditors,

taxpayers, and the entire economy felt the devastating effects. Such

6

See infra Parts I.A and I.B.

7

See Annual Report Statistics,DEL.DIV.CORPS., https://corpfiles.delaware.gov/Annual-Reports/

Division-of-Corporations-2018-Annual-Report.pdf (last visited Sept. 25, 2020) [hereinafter

Delaware Annual Report] (reporting that over two-thirds of Fortune 500 companies are incor-

porated in Delaware).

8

In the view of the Chief Justice of the Delaware Supreme Court, “American corporate law

makes corporate managers accountable to only one constituency—the stockholders[.]”Leo

E. Strine, Jr., Making It Easier for Directors to “Do the Right Thing”?,4H

ARV.BUS.L.REV.

235, 241 (2014).

9

See OFF.OF THE COMPTROLLER OF THE CURRENCY,THE DIRECTOR’SBOOK:ROLE OF DIRECTORS

FOR NATIONAL BANKS AND FEDERAL SAVINGS ASSOCIATIONS 22 (2016), https://www.occ.gov/

publications-and-resources/publications/banker-education/files/the-directors-book.html

[hereinafter OCC HANDBOOK] (stating that the duty of loyalty “requires that directors exer-

cise their powers in the best interests of the bank and its shareholders rather than in the

directors’own self-interest or in the interests of any other person”).

10

See FINANCIAL CRISIS INQUIRY,supra note 4, at xviii–xix (identifying excessive risk-taking as

a primary cause of the financial crisis). It would be a gross oversimplification, however, to

state that excessive risk taking by big banks was the cause of the financial crisis. Myriad fac-

tors contributed to the meltdown that were out of the hands of even the highest-ranking

bank executives. This article, however, addresses a single contributing factor: the legal con-

ditions that allowed managers of some national banks to hyperfocus on returns to

shareholders.

2021 / Aligning National Bank Priorities7