These involve granting differential voting rights to different classes of shares. This too, in some respects, is back to the future. It has echoes of the restricted or graduated shareholder rights models seen over a century ago. Dual class listings remain common practice in a number of countries today, especially in emerging markets. Interestingly, however, there have also been some signs of dual class shares recently playing a greater role in the US. A number of recent high profile US company IPOs, such as Facebook and Google, have issued dual class stock. 25  See Carney (2014). 26  See also Mayer (2013). 14  BIS central bankers’ speeches  These laws and emerging practices are in their early throes and are not uncontentious, especially among institutional shareholders. Nonetheless, they are symptomatic of a common desire to strengthen long-term investors’ hand in the oversight of companies. If these initiatives grew in prominence, they would begin to address some of the short-term and risk-shifting problems embedded in the current corporate governance model. Corporate governance If alterations to the balance of shareholder rights are increasingly under debate, the same is not true of the rights of creditors and other stakeholders. In principle, the case for recognising explicitly these broader interests seems sound enough. In a recent paper, I considered the risk-shifting problem within companies and various solutions to it (Haldane, Richardson and Willison (forthcoming)). The most effective was simply to alter the objectives of the company to reflect creditor, as well as shareholder, interests.
Instead it is shifted onto other stakeholders in the company, most obviously creditors. There is, in the words of Jensen and Meckling (1976), an incentive for the management of a limited liability company to engage in “risk shifting” from shareholders to debtors, by increasing company-specific risk. The scale of these incentives will depend importantly on how alert creditors are to this risk. If they are wide-awake and price that risk by charging the firm a higher interest rate in anticipation of risk-shifting, this serves as a disciplining device on management. Risk shifting will then be stymied. However, if creditors lack the information or incentives to monitor risk, risk-shifting will be amplified given the cheap costs of borrowing. The upshot, then, will be companies engaging in a sub-optimally high amount of risk-taking from a stakeholder, if not shareholder, perspective. Banks provide an interesting case study of these incentive dynamics in practice and their adverse implications for creditors and the wider economy. They have a particularly simple way of increasing the volatility of their asset returns – increasing leverage. They may also have stronger incentives to do so if their creditors – largely depositors – are de-sensitised to risk when setting their cost of borrowing (Haldane (2012)). If so, this is a recipe for super-charged risk-shifting – and was in the run-up to the crisis. Leverage among global banks rose at real pace in the pre-crisis period, in a quest for everhigher banking returns on equity (Chart 7).