The essential goal behind the decision making policies of a bank is to capitalize on the wealth of the bank’s shareholders. At times, there are some managers in the banks that make decisions that are in their own best interest as to oppose to the shareholders interest. For instance, decisions that affect the growth of the bank may be proposed to raise employees salaries, where as larger banks have the tendency to provide more employee compensation. Also, “the compensation to a bank’s loan officers may be linked to loan volume, which encourages a loan department to extend loans without concern about any risk.” (Madura, 2008) “As these examples suggest, banks can incur agency costs, or costs resulting from managers increasing their own wealth as to oppose to the shareholders wealth.” (Madura, 2008) For banks to prevent these types of agency problems, a few banks give stock as compensation to managers. With those types of managers they normally will make sure to maximize the shareholders wealth because they are also shareholders. If any of the decisions made by the manager are conflicting with the goal of maximizing the shareholders wealth, the share price will not be able to attain its highest.
The board of directors are either appointed or elected to act as, representatives of the stockholders to institute corporate management related policies and to make decisions on major company matters. Some duties include the hiring and firing of executives, dividend policies, options policies and executive compensation. They are the ones who try to make sure that when the managers are making a decision that it is in the best of interest of the shareholders. Some of the more important functions of bank directors are to decide the payroll system for the bank’s executives. They make sure accurate disclosures of the bank’s financial stand point and performance to investors. Not