What ‘Shawshank’ suggests to me, is a surname from the Scottish Borders. The name is made up of two elements that are common in English and Scots surnames and placenames: ‘shaw’ meaning ‘covert’ or ‘shelter’; and ‘shank’ meaning literally ‘leg’ but figuratively ‘a projecting point of a hill’.
‘Shaw’ is found in surnames deriving from placenames:
A ‘shaw’ or ‘schaw’ was a small woody shade or covert. An old manuscript† says—
In somer when the shawes be sheyne,
And leves be large and long.
It is fulle mery in feyre fareste
To here the foulys song.
As a shelter for game and the wilder animals, it is found in such compounds as ‘Bagshaw,’ the badger being evidently common; ‘Hindshaw,’ ‘Cockshaw,’ ‘Henshaw,’ and ‘Earnshaw.’‡ The occurrence of such names as ‘Shallcross’ and ‘Shawcross,’ ‘Henshall’ and ‘Henshaw,’ and ‘Kersall’ and ‘Kershaw,’ would lead us to imagine that this word too has been somewhat corrupted. Other descriptive compounds are found in ‘Bradshaw,’ or ‘Langshaw,’ or ‘Openshaw.’
Charles Wareing Bardsley (1873). Our English Surnames: Their Sources and Significations, p. 91. London: Chatto and Windus.
† ‘Robin Hood and the Monk’ (Child ballad 119). ‡ An ‘earnshaw’ is a heron, from Anglo-Norman ‘herouncel’; I think Bardsley must be mistaken in deriving the name from ‘shaw’ meaning ‘covert’.
‘Shank’ meaning ‘leg’ is found in surnames deriving from nicknames:
‘Jambe’ was the Norman synonym of ‘Shank,’ and by way of more definite distinction we light upon the somewhat flattering ‘Bellejambe,’ the equally unflattering ‘Foljambe,’ the doubtful ‘Greyshank,’ the historic ‘Longshank,’† the hapless ‘Cruikshank,’ the decidedly uncomplimentary ‘Sheepshank,’ and last and worst ‘Pelkeshank,’ seemingly intended to be ‘Pelican-shanked,’ which, when we recal the peculiar disproportion of that bird’s extremities to the rest of its body, affords ample reason for the absence of that sobriquet in our more modern rolls.
Bardsley, p. 387.
† A nickname given to Edward I of England, a tall man for his time.
But in Scotland ‘shank’ is used in place names with this meaning:
SHANK 3. The projecting point of a hill.
“I heard a queer unearthly greet coming down the shank, and wixing ay nearer and nearer to the byre door.” Blackwoods Magazine, November 1820, p. 201.
John Jamieson (1882). An Etymological Dictionary of the Scottish Language, volume 4, p. 193. Paisley: Alexander Gardner.
Examples include Bowshank (a village) and Gairshank (a hill) in the Scottish Borders.
Putting this together, ‘Shawshank’ suggests a placename in the Scottish Borders, meaning something like ‘wooded point of a hill’. The placename could have been used as a surname for a family that originated there, and when the descendants of that family emigrated to the United States (as many Scots did in the late 18th and 19th centuries) they took the name with them and it became attached to the town where they settled in Maine, and hence eventually to the penitenitiary of the novel.