To Pay or Not Pay: Directors' Remuneration and Insolvency Risk in Credit Unions

Abstract

This study examines the effect of directors’ pay on insolvency risk in member-owned organisations, such as credit unions. This research uses a unique setting of Australian credit unions, where a significant shift is observed from a traditional volunteer board nature to one that compensates directors, to test the hypotheses. Specifically, this study investigates the impact of the remuneration of board members and other board governance and credit-union specific factors that are expected to affect credit unions’ probability of insolvency. The main finding is that remuneration packages for credit union directors tend to decrease insolvency risk, measured by the accounting-based Z-score measure, only when directors are paid more rather than less. This study provides important insights into the ongoing global debate on whether or not to remunerate credit union board members and their relationship with risk-taking behaviour in the context of cooperative financial institutions.