Corporate governance and bank financial sustainability: Empirical evidence from the G7 countries

Abstract

The increased interdependence of the world’s economies made corporate governance a crucial tool to achieve global sustainability. Although there has been considerable research on the impact of corporate governance mechanisms on corporate performance, no empirical evidence is found on G7 countries and how their banks can be classified by their governance behaviors. Additionally, empirical evidence on how the heterogeneity of banks’ governance affects their performance is limited. We contribute to the literature by segmenting the G7 banks’ governance practices into heterogenous groups and examining their impact on financial sustainability measures. We use a unique two-step algorithmic analysis to reveal natural groupings based on 12 board characteristics and environmental, social and governance (ESG) reporting followed by utilizing regression analysis to examine their impact on financial performance. Using 3,573 bank-year observations for G7 listed banks over the period 2011–2019, we provide evidence that corporate governance mechanisms are important in differentiating banks’ practices and considered essential to their financial sustainability. The findings of their associations suggest mixed results implying that their impact varies based on time, space, and ecology. This may require the development of dynamic governance practices using machine learning tools, aiming to achieve a healthy investment climate and sustainable global economy.