Corporate governance structure and efficiencies of cooperative banks

Abstract

How to discipline managers of cooperative structured financial institutions (co-ops) is considered a critical issue by the Japanese financial regulatory authorities because co-ops play a significant role in the domestic banking market, especially for small and medium-sized enterprises. This paper seeks to clarify whether the effect of the governance-related variables on firm performance varies across stock and cooperative banks in Japan. We consider regional banks as a proxy of stock banks and Shinkin banks, one of the representative co-ops, as a proxy of cooperative banks. We use cost and profit efficiency scores obtained from stochastic frontier analysis as performance measures. The results in this paper confirmed that having a large number of board members has negative effects on efficiency measures for both stock and cooperative banks. On the other hand, the presence of outside directors has a significant effect on efficiency measures for cooperative banks, whereas such variables have no significant effect for stock banks. These results suggest that outside directors' discipline is more necessary for cooperative banks than for stock banks, which are under strong pressure from shareholders. For cooperative banks, a high ratio of representative council members, which is the most important decision-making body for Shinkin banks, has negative effects on efficiency measures. Our findings support the current proposals of the financial regulatory authorities' council to appoint outside directors to the board as a means for strengthening governance of the co-ops.

Board diversity, corporate governance, corporate performance, and executive pay

“…Economic, financial, governance, political, and social reforms are being pursued worldwide (Bussiere & Mulder, 2000;Gupta, Baldacci, Clements, & Tiongson, 2005;Swamy & Dharani, 2018). Recent corporate scandals have directed more attention to CG and EP mechanisms (Hasan, Kobeissi, & Song, 2014;Ullah, Ahmad, Akbar, & Kodwani, 2018a), especially on the importance of board of directors in terms of their roles, effectiveness, composition, and diversity (Carter, D'Souza, Simkins, & Simpson, 2010;Carter, Simkins, & Simpson, 2003;Yamori, Harimaya, & Tomimura, 2017). It is worth noting, however, that the extent to which such contemporary economic, financial, governance, and social (e.g., education) reforms influence a number of key corporate outcomes is rarely investigated (Salloum et al, 2017).…”

“…Board of directors is one of the top decision-making subgroups in modern organizations (Dale-Olsen, Schone, & Verner, 2013;Luckerath-Rovers, 2013;Mahadeo, Soobaroyen, & Hanuman, 2012;Ntim, 2015;Roberson & Park, 2007;Yamori et al, 2017). Corporate boards possess the responsibility for making strategic decisions regarding mergers and acquisitions, hiring, firing, compensating, and promoting executives, among others (Abdullah, 2014;Jensen, 1993;Ntim, Lindop, Thomas, Abdou, & Opong, 2017).…”

Corporate Governance Features and Efficiency: Evidence from the Saudi Arabian Banks

“…Contrary to evidence, they concluded that banks with larger boards do not under-perform their peers in terms of Tobin's Q and that, as a result, constraints on board size in the banking industry may be counter-productive. Yamori et al (2017) confirm that having a large number of board members has negative effects on efficiency measures for cooperative banks. In addition, while the authors find no significant effect for stock banks, results show that the presence of outside directors has a significant effect on efficiency measure for cooperative banks.…”

Systematic review of factors influencing the effectiveness of the co-operative board

“…The four main themes are board composition (two sub-themes), board characteristics (five sub-themes), board structure (one sub-themes) and board process (four sub-themes) as shown in Table 2. A total of eight studies focused on examining the factors that influence the effectiveness of the cooperative board in the context of Asian countries (Azadi, Hosseininia, Zarafshani, Heydari, & Witlox, 2010;Cahya Kusuma et al, 2019;Chareonwongsak, 2017;Choi et al, 2014;Hasan, Azhari, & Abd. Majid, 2018;Huang et al, 2013;Rosairo, Lyne, Martin, & Moore, 2012;Yamori et al, 2017). Meanwhile, in the European countries, three studies, i.e., Spain, Italy and Sweden (D'Amato & Gallo, 2019;Hakelius, 2018;Hernández-Nicolás et al, 2019), and two studies represent continental American, namely Unites State of America and Brazil, explicated the factors leading to the effectiveness of the co-operative board (Franken & Cook, 2019;Pozzobon & Zylbersztajn, 2013).…”

“…The effectiveness of the board in performing strategic roles depends strongly on their ability to perform their functions (Murphy and McIntyre, 2007), and there has been a growing empirical investigation (e.g. (Choi, Choi, Jang, & Park, 2014;Hakelius, 2018;Huang, Fu, Liang, Song, & Xu, 2013;Yamori, Harimaya, & Tomimura, 2017)) into board attributes influencing the co-operative board's effectiveness.…”