How Does Corporate Governance Affect Bank Performance? The Mediating Role of Risk Governance

Paola Leone,Rosalia Santulli,Carmen Gallucci

doi:10.5539/ijbm.v13n10p212

Abstract

This paper aims to investigate how bank governance (board size, board composition, ownership structure) affects performance (ROA), by considering the mediating role of risk governance (presence of a risk committee, the number of meetings of the risk committee in one year, the risk committee size, the percentage of independent directors in the risk committee, and the presence of a chief risk officer). A sample of 31 Italian listed banks is examined over a ten-year period (2008-2017), in order to delineate the changes in corporate governance structure and to catch the effects of the current national and European regulations followed to the financial crisis. Hypotheses are tested by applying a mediation analysis according to the causal steps procedure. The main findings suggest that risk governance fully mediates the corporate governance-bank performance relationship. Specifically, we find that the board size is positively related to the presence of a risk committee and to the number of meetings. The percentage of independent directors on board is positively related to the percentage of independent directors in the risky committee and, in turn, has a positive effect on performance. Finally, the presence of institutional owners is positively related to the presence of a chief risk officer and, thus, to bank performance. Summing up, banks with wider and more heterogeneous boards of directors have better risk management-related corporate governance mechanisms and reach higher performance levels.

Highlights

On the wave of the recent financial crisis, the corporate governance of financial institutions has heated the policy debate and has become the focus of a swarm of academic research (e.g., Pathan & Skully, 2010; Aebi et al, 2012; Liang et al, 2013; Pathan & Faff, 2013; Stulz, 2016; Abou-El-Sood, 2017; Farag & Mallin, 2017)
The main findings suggest that risk governance fully mediates the corporate governance-bank performance relationship
We find that the board size is positively related to the presence of a risk committee and to the number of meetings

Summary

Introduction

On the wave of the recent financial crisis, the corporate governance of financial institutions has heated the policy debate and has become the focus of a swarm of academic research (e.g., Pathan & Skully, 2010; Aebi et al, 2012; Liang et al, 2013; Pathan & Faff, 2013; Stulz, 2016; Abou-El-Sood, 2017; Farag & Mallin, 2017). In order to avoid possible failures, representing a great concern to policy makers, and in order to guarantee that banks can identify, evaluate and manage the risks to which they are exposed, it is necessary to discipline through appropriate regulations the bank governance. Recent academic studies have emphasized that, during the financial crisis of 2007/2008, a crucial role on the reduction of banks’ performance was played by the weaknesses in bank governance (e.g., Diamond & Rajan, 2009). A recent OECD report has ncluded that the flaws in bank governance have contributed in a relevant manner to the financial crisis (Kirkpatrick, 2009). Bank governance deserves special attention and it makes interesting to examine its mechanisms, aiming to mitigate opportunistic behaviors and to reflect the needs of shareholders, creditors, and the taxpayer (Srivastav & Hagendorff, 2016), and its effects on bank performance

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Methods

Conclusion