How Corporate Governance Mechanisms of Banks Have Changed After the 2007–08 Financial Crisis

Abstract

Weak and ineffective corporate governance mechanisms in banks have been pointed out as the main factor that contributed to the 2007-08 financial crisis. The purpose of this study is to analyze empirically how the global financial crisis of 2007-08 has impacted on banks' governance mechanisms, comparing the differences between the two most important models of corporate governance (the shareholder and stakeholder models), and if these changes are related to improvements in banks' governance effectiveness. To carry out our analysis, we have used a sample with 46 of the largest commercial banks in the world and the period of analysis has covered from 2002 until 2015. Our findings show that Anglo-American banks following the common law system (shareholder model) maintained their high level of governance effectiveness after the financial crises. On the other hand, Continental European banks following the civil law system (stakeholder model) increased their effectiveness after the crisis changing some practices in their corporate governance mechanisms (improvements in the structure and functioning of directors' boards, improvements in the compensation policy for banks' executives, as well as the implementation of CSR committees) what led to a convergence of both governance systems. Policy Implications• Strong governance practices are essential to have effective bank systems that is critical to achieve and maintain a higher level of public confidence in the banking system.• The 2007-08 financial crisis has meant a convergence of governance practices between the common and civil law systems of corporate governance.• The convergence between both systems can be explained mainly by the improvement in the governance mechanisms of Continental European banks, increasing their level of governance effectiveness.• The implementation of CSR or sustainability committees in the banking sector has improved banks' accountability and transparency.• Changes in the compensation policy for banks' executives after the financial crisis have improved the banks' governance effectiveness regardless the governance system.

Do ESG scores effect bank risk taking and value? Evidence from European banks

“…Specifically, we examine the link between bank ESG scores on the one hand and bank risk‐taking and value on the other hand in a sample of European banks over 2007–2018. Our focus is the post financial crisis period given the reforms introduced to improve banks' corporate governance that have been implemented at the international, supranational and national levels since then (e.g., Fernández Sánchez, Odriozola Zamanillo, & Luna, 2020; Mülbert, 2009). As in this period regulators and the investing public broadened the role of corporate boards to include risk oversight (OECD, 2014), we also examine how executive board characteristics (size, independence and gender composition) interact with ESG scores to impact on bank risk‐taking and value.…”

Corporate governance hierarchies and the performance of commercial banks in Cameroon

“…According to Marcinkowska (2012), corporate governance mechanisms essentially contributed to banking crisis in the world between 2007 and 2008. This led researchers and experts to carry out studies on what characterizes corporate governance mechanisms' effectiveness in the banking industry (Cotugno et al, 2020; de Haan & Vlahu, 2016; Fernandez Sanchez et al, 2020).…”

“…Studies in banks' governance have identified elements that contribute to the effectiveness of the governance mechanisms identified above. Hence, for board of directors, Fernandez Sanchez et al (2020) refer to smaller board size, expertise, independence, and blockholding as instruments that increase board of directors' effectiveness. To these characteristics of the board are to be added the board composition and the CEO duality.…”

“…The other mechanisms mentioned above, namely, board committees, require that directors regularly attend to meetings for the board to be effective (de Haan & Vlahu, 2016). In terms of executive compensation, Fenandez Sanchez et al (2020) recommend that it should be aligned with shareholdership's position in order to avoid opportunistic behavior. This favors the effectiveness of the CEO and directors in their activities.…”

Importance of Corporate Governance: Evidence from Kosovo’s Banking Sector

“…Finally, from a policy viewpoint, it contributes to the redesign of sector policies in the financial industry and the support of this industry by identifying specific initiatives to address the environment and institutional asymmetry. Solid governance practices are important to have effective bank systems that are critical to accomplish and sustain a higher level of public confidence in the banking system (Fernández Sánchez, Odriozola Zamanillo, & Luna, 2020).…”