Corporate Ownership & Control / Volume 16, Issue 1, Autumn 2018, Continued - 1

CORPORATE GOVERNANCE IN BANKS:

SYSTEMATIC LITERATURE REVIEW AND
META-ANALYSIS
Valentina Lagasio *
* Faculty of Economics, Sapienza University, Italy
Contact details: Management Department, Faculty of Economics, Sapienza University, Via del Castro Laurenziano, 9 - 00161 Rome, Italy

Abstract

How to cite this paper: Lagasio, V. This paper provides a two steps investigation of the literature on
(2018). Corporate governance in banking corporate governance. We firstly perform a systematic
banks: Systematic literature review and
meta-analysis. Corporate Ownership & literature review on the academics papers focused on risk
Control, 16(1-1), 113-126. management, compensation and ownership structure of banks.
http://doi.org/10.22495/cocv16i1c1art1 Then we run a meta-analysis investigation over more than 2,500
observations to clarify the understanding of the relationship with
Copyright © 2018 The Authors
performance and risk in banks. The sub-group analysis related with
This work is licensed under the Creative bank performance shows a clear and significant finding: Board
Commons Attribution-NonCommercial ownership, CEO ownership and Controlling shareholder enhance
4.0 International License (CC BY-NC 4.0). the performance of banks. Conversely, State ownership is
http://creativecommons.org/licenses/b
negatively associated with bank performance. Results of the whole
y-nc/4.0/
investigation and directions for scholars are also discussed.
ISSN Online: 1810-3057
ISSN Print: 1727-9232 Keywords: Corporate Governance, Banks, Systematic Review, Meta-
Analysis
Received: 01.10.2018
Accepted: 26.12.2018

JEL Classification: G20, G21, G30,

G32, G34, G38
DOI: 10.22495/cocv16i1c1art1

1. INTRODUCTION include developing or strengthening existing

regulation or guidance, raising supervisory
In this paper we review the academic papers on expectations for the risk management function,
corporate governance of banks published from 1990 engaging more frequently with the board and
to 2018. The review is conducted in two steps: we management, and assessing the accuracy and
firstly apply a systematic literature review to usefulness of the information provided to the board
identify the relevant papers in this topic, then we to enable effective discharge of their responsibilities
run a meta-analysis methodology to assess the (FSB, 2013). The second pillar of Basel II identifies
prevailing results of prior researchers. We restrict the role of the board as an integral aspect of risk
the research on three main areas of corporate management, therefore aligning the internal
governance of banks, given their importance from governance structure in the light of comprehensive
both academics and policy makers perspectives: risk risk management approach seemed like an
management; ownership structure and executive immediate need. Both academics and policy makers
compensation. As a matter of fact, banks are in the recognize that two of the most important internal
business of taking risks. Since the crisis, risk governance mechanisms which support the
management function has received increasing comprehensive risk management framework are the
attention due to its decisive role in risk-avoiding, establishment of an independent Chief Risk Officer
that has been revealed to be insufficient and weak (CRO) and/or Risk Management Committee that will
(Brogi & Lagasio, 2018). Thus, banking regulatory have an oversight responsibility for all risks
bodies have responded, proposing long overdue undertaken by the bank. Indeed, assigning the role
principles of good Corporate Governance of risk management to a board-level committee is
(McConnell, 2011). In particular, National authorities becoming more common among large companies,
have taken several measures to improve regulatory notably in the financial sector (OECD, 2017). From
and supervisory oversight of risk governance at an Institutional perspective, the EP (2013)
financial institutions so as to ensure sound risk encourages Member States to introduce principles
governance through changing environments and and standards to ensure effective oversight by the
tightening up on the roles and responsibilities of management body, promote a sound risk culture at
boards of directors (Brogi, 2011). These measures all levels of credit institutions and investment firms

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and enable competent authorities to monitor the predominant concern, while "vertical" agency
adequacy of internal governance arrangements. In problems that arise between managers and
order to assess the progress of national authorities shareholders may be mitigated (Vermeulen, 2013).
and the banking industry in the area of risk Indeed, in the last decade, even countries
governance since the global financial crisis, the FSB characterised by dispersed ownership structures,
issued a Thematic review on risk governance in have introduced special arrangements to address the
February 2013 as part of its series of peer reviews. "horizontal" agency problems that can arise between
The peer review found that financial institutions and controlling and minority shareholders (OECD, 2017).
national authorities have taken measures to improve Nonetheless, the effect of the separation of
risk governance. Nonetheless, standard setters' ownership and control has been left undetermined
attention and awareness to this issue is being given and is still focus of debate. Specifically related to
mostly since the early aftermath of the last financial banks, Ownership has been investigated in the
crises1. However, more work is needed by both literature of last 30 years, as outlined further in this
national authorities and banks to establish effective paper. The meta-analysis shows that previous
risk governance frameworks and to enumerate researches related to the effect of Ownership
expectations for third-party reviews of the structure on risk do not identify a prevailing result
framework. Banks also need to enhance the in determining the best configuration of the
authority and independence of CROs. For instance, variables. Conversely, there is a clearer
National authorities need to strengthen their ability understanding of the impact of Ownership structure
to assess the effectiveness of a bank's risk on bank performance: banks with high level of Board
governance and its risk culture and should engage ownership, CEO ownership and Controlling
more frequently with the board and its risk and shareholders enhance their performance. Finally,
audit committees (BCBS, 2015). The results of the executive compensation is a hot subject for
analysis on this topic, confirms its constantly researchers in banks' corporate governance
increasing relevance since the crisis and shows that especially in the aftermath of 2007/2008 financial
academic literature still presents mixed result. A crises (OECD, 2015). Indeed, there is a wide
second widely researched topic in banking consensus in the literature regarding executive
Corporate Governance literature (Shleifer & Vishny, compensation that its level and composition may
1986) is Ownership structure. From a firms increase the risk-taking behavior of bank managers
perspective, it was initially inspected by Berle and (Houston & James, 1995; Adams & Mehran, 2003;
Means (1932), whose study points out the issue of Webb, 2008; Bebchuk et al., 2010; Gropp & Kohler,
the separation of ownership and control, being 2010; Grove et al., 2011; DeYoung et al., 2013;
"concerned with the survival of organizations in Chaigneau, 2013). This is the reason why both
which important decision agents do not bear a principle setter and regulators identify it as a critical
substantial share of the wealth effects of their issue in banks' soundness and stability. Moreover,
decisions" (Fama & Jensen, 1983b). They also executive compensation has also become a topic of
discover that firms' performance is negatively intense debate among principles setters (e.g. OCSE,
affected by a diffuse ownership structure. 2015; 2017; BCBS, 2015; EBA, 2015), regulators (e.g.
Concerning this issue, the agency theory (Jensen & EP, 2013) and media (e.g. Rajan, 2008; Rajan et al.
Meckling, 1976) identifies managers as the agents 2008; Kyrkpatric, 2009), with a particular focus on
whose function is to maximize shareholders' CEO compensation (Bai & Elyasiani, 2013;
interests, recognised as principals. In a situation of Fahlenbrach & Stulz, 2011; Thanassoulis, 2011;
separation between ownership and control, agents, Hagendorff & Vallascas, 2011; Tian & Yang, 2014).
who are not owners of the firm, may commit “moral Remuneration structure, and in particular, executive
hazards' since their interests are not aligned with compensation, is one of the most debated topic in
those of principals (Jensen & Meckling, 1976). This Corporate Governance literature of both firms and
view is consistent with Jensen (1983b) who also financial institutions. Also principle setters discuss
identifies two different solutions in order to solve about this subject in detail defining remuneration as
principal-agency problems. One is to align principals a practice supporting Corporate Governance
and agents' risk-taking and the other is to enhance soundness (OECD, 2004; 2015; BCBS, 2010; 2015).
the monitoring of ownership structure. Agency Moreover, to achieve soundness it is emphasized
theorists have long considered concentrated that remuneration policy should be focused on the
ownership as a governance mechanism that may longer run interests of the company over short term
reduce agency costs (Glassman & Rhoades, 1980; considerations (OECD, 2004; 2015; BCBS, 2010;
Shleifer & Vishny, 1997). Indeed, in those companies 2015). Referring in particular to financial
with concentrated ownership structures, institutions, BCBS asserts that remuneration
"horizontal" agency problems that arise between structure is also linked to bank risk-taking behavior,
controlling and minority shareholders are the furthermore it should be in line with the business
and risk strategy, objectives. To sum up, both
1
For instance, OECD (2009) states: "Perhaps one of the greatest shocks from standard setters and regulators pay attention to
the financial crisis has been the widespread failure of risk management. In executives' compensation, due to the need of
many cases risk was not managed on an enterprise basis and not adjusted to concern and awareness regarding this issue. The
ability of the board to effectively oversee executive
corporate strategy. Risk managers were often kept separate from
remuneration appears to be a key challenge in
management and not regarded as an essential part of implementing the
practice and remains one of the central elements of
company's strategy. Most important of all, boards were in a number of cases
the Corporate Governance debate in a number of
ignorant of the risk facing the company." EBA (2011) states that an
jurisdictions. Implementation of the OECD Principles
institution shall develop an integrated and institution-wide risk culture, thus remains a challenge (OECD, 2010). Focusing on
based on a full understanding of the risks it faces and how they are banks, BCBS (2010) in the first edition of its
managed, taking into account its risk tolerance/appetite.

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Principles for Enhancing Corporate Governance 2007 to 31st December 2008), investigate whether
developed suggestions regarding compensation and risk management-related Corporate Governance
link compensation systems to both bank mechanisms, made banks perform better during the
performance and risk. The Committee in the same financial crisis of 2007/2008. In particular, they
year also provided the Compensation Principles and examine if the presence of a CRO in a bank's
Standards Assessment Methodology (2010) so as to executive board and whether the CRO reports to the
"guide supervisors in reviewing individual firms' CEO or directly to the BoD, are associated with a
compensation practices and assessing their better bank performance measured by buy-and-hold-
compliance with the FSB Principles and Standards, returns and ROE, controlling for various Corporate
and seeks to foster supervisory approaches that are Governance characteristics (CEO ownership, board
effective in promoting sound compensation size, and board independence). Findings reported in
practices at banks and help support a level playing their paper show that banks, in which the CRO
field." From an institutional perspective, the EC directly reports to the BoD and not to the CEO,
issued legislative proposals to grant shareholders performed significantly better in terms of both
the right to vote on remuneration policy and the performance measures. A similar result is provided
remuneration report (EC, 2014). Moreover, the CRD by Ellul and Yerramilli (2013). They explore the
IV approved by the EP in 2013 impose a cap on implication of a strong and independent RM to bank
banking executives' incentives. Indeed, many risk-taking and performance using a sample of 74
jurisdictions have adopted rules on prior large US BHCs over the period 1995–2010. They
shareholder approval of equity-based incentive construct a Risk Management Index (RMI), which is
schemes for board members and key executives. based on five variables related to the strength of a
More recently, EBA (2015) provide a draft of its bank's RM (CRO Present, a dummy variable that
Guidelines to set out the governance process for identifies if the BHC has a designated CRO; CRO
implementing sound remuneration policies across Executive, a dummy variable that identifies if the
the EU and also aim to identify specific criteria for CRO is an executive officer; CRO-Top5, a dummy
mapping all remuneration components into either variable that identifies if the CRO is among the five
fixed or variable pay. At a national level, United highest paid executives; and CRO Centrality, defined
Kingdom (2002) introduced a non-binding as the ratio of the CRO's total compensation to the
shareholder vote on executive compensation "Say- CEO's total compensation). The authors find that
on-Pay", which one of the main aims was to improve banks with a higher RMI value in 2006 performed
performance linkage of executive pay. This practice better in the crisis period than others, and were also
was also followed by US (2010) and Australia (2011). less risky. Their conclusions are supported by lower
Furthermore, in UK new rules came into force in tail risk and lower level of NPLs for better risk-
September 2013, where publicly traded companies managed banks in 2006. Zagorchev and Gao (2015)
are required to submit the company's remuneration use 41 factors of the RiskMetrics' Corporate
policy report for a binding shareholder vote at least Governance index (CG41) to examine how Corporate
every three years. To sum up, there has been a rich Governance affects US financial institutions over the
policy effort to entail firms, and especially banks to period 2002-2009. The authors find a negative
achieve a more long- term-oriented awareness relationship between better governance and
regarding compensation structure and also a better- excessive risk-taking (proxied by non-performing
defined performance based view to reduce excessive assets and real estate non-performing assets).
risk-taking, as a response to the financial crisis. This Moreover, their results also support a positive
premise confirms the relevance of this paper, which association between better governance and
helps in clarifying the understanding of the performance (measured by Tobin's Q). Mongiardino
relationship between corporate governance of banks and Plath (2010) investigate the role of independent
and their performance and risk. It contributes to the directors in RM. According to this study risk
literature on banks' corporate governance by trying governance requires a dedicated board-level risk
to identify the prevailing results and the existence of committee, of which a majority should be
best practices in Risk management, Ownership independent, and that the CRO should be part of the
structure and Compensation of banks. Thus, this bank's executive board. Based on a survey among 20
paper may also be relevant in terms of policy large banks, they find that only a small number of
implication. banks followed these guidelines in 2007. Most risk
The reminder of the paper is organized as committees were not comprised of enough
follows: Section 2 review the literature on the three independent and financially knowledgeable
selected area of corporate governance; Section 3 members. Similarly, Kanagaretnam et al. (2010)
explains the methodology; results are reported in examine auditor independence in the banking
Section 4; and Section 5 concludes by commenting industry by analyzing the relation between fees paid
the obtained results and suggesting for further to auditors and the extent of earnings management
researches. through loan loss provisions. They find that
especially relating to small banks, auditor fee
2. LITERATURE REVIEW dependence on the audit client is associated with
earnings management via abnormal loan loss
provisions. Thus, the authors also suggest to
2.1. Risk management
policymakers to contemplate new regulations in
light of the banking crisis. A complementary view is
The systematic literature on the relation between provided by Barakat and Hussainey (2013) who
banks' corporate governance and risk management recommend to enhance risk disclosures by
shows that academic literature still presents mixed establishing independent specialized national
result in this research area. Aebi et al. (2012), using committees or task forces to monitor and advise
data on 573 US banks over the crises period (1st July

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Pillar 3 disclosures in banks. As a matter of fact, find a negative relationship between ownership
academic literature still presents mixed result, concentration and banks market value. In particular,
furthermore, "there exist fundamental risk-incentive they use a GMM dynamic estimator that lead them to
mechanisms that operate in exactly the opposite find a negative effect of ownership concentration on
direction" (Boyd et al., 2005). Furthermore, the banks Tobin's Q. Nonetheless, their major finding is
diversity among financial system institutions lead to that the obtained results varies across different
different risks faced by banks, supporting the institutional settings. Indeed, the negative effect is
unlikeliness to apply a single instrument of financial particularly strong in countries belonging to
stability policy (Ellis et al., 2014). CEOs are key Germany, France or Common law legal tradition,
decision makers. In particular, their risk propensity contrariwise, the authors find a positive effect of
has a decisive role in the definition of the strategy of concentration on Scandinavian banks. Busta et al.
the bank (Adams & Ferreira, 2007). As a (2014) argues that these differences could derive by
consequence, their position has a strong effect on the identity of the predominant owners (financial
both bank risk and performance. For instance, Luu institutions and family in the first group, trusts and
(2015) finds that more powerful CEO tend to engage foundations in Scandinavia). Actually, as above
in less risky activities. However, empirical research mentioned, owners' type matter. The first study
on the impact of CEO duality on banks' risks resulted by the research conducted that is related on
(Simpson & Gleason, 1999; Pathan, 2009, Boujelbène this issue is Saunders et al. (1990). The authors show
& al., 2013; Cornelli et al., 2013) provide different that stockholder controlled banks exhibit
conclusion and most of the findings are not significantly higher risk-taking behavior than
supported by sufficient significance. Finally, as "managerially" controlled banks during the 1979-
concerns risk management, Aebi et al. (2012) and 1982 period of relative deregulation. Lately,
Ellul and Yerramilli (2013) find that banks in which Anderson and Fraser (2000) investigate whether or
the Chief Risk Officer directly reports to the board not managerial shareholdings affect banks risk-
of directors and not to the Chief Executive Officer taking of an International sample observed in the
performed significantly better in terms of both period 1987-1994. Their results show a strong a
performance and risk measures. Mongiardino and positive observation of the analysed variables,
Plath (2010) governance requires a dedicated board- although they present some differences in the
level risk committee, of which a majority should be period 1980s, due to the financial distress and the
independent, and that the CRO should be part of the less level of bank regulation. Consistent are also
bank's executive board. Anderson and Fraser (2000) and Kabigting (2011).
The latter finds that insider ownership has
2.2. Ownership structure significant positive relationship with ROA, bank size
and Earning Per Share (EPS). Westman (2011)
Researches related to ownership structure can be in inspects a sample composed by 477 European
turn divided in two different strands of literature. A traditional and non-traditional banks over 2000-
first sub-field deals in ownership concentration, the 2006 and finds directors' ownership positively
other is focused on owners' type. Concerning the affecting traditional banks profitability, whereas
first dimension, one of the studies who investigate management ownership has a similar effect in non-
the empirical relationship between ownership traditional banks sample. At last, Berger et al. (2012)
concentration and profitability in banks is Shehzad by looking for a relationship between different
et al. (2010) which results show that concentrated Corporate Governance drivers and US commercial
ownership has a significant positive effect on bank banks risk, provide evidence that banks' probability
risk-avoiding. Indeed, the authors, use a sample of default is strongly and negatively affected by
composed by 500 cross-country banks over the insider ownership. Fahlenbrach and Stulz (2011) find
period 2005-2007 and find that a higher level of that higher insider ownership and higher sensitivity
concentration lead to a reduction of NPLs ratio. of CEO wealth to bank performance represent better
Similarly, Adnan et al. (2011) investigate the alignment of interests. Indeed, there is a strand of
efficiency of Malaysian listed banks during 1997- literature regarding banks ownership, trying to asses
1998, trying to link it with banks' ownership specifically the association of CEO ownership and
structure. The authors, using a GLS multivariate bank efficiency, obtaining mixed results. For
regression, find that block ownership lead to better instance, Pathan (2009) find statistically significant
efficiency of Malaysian banks, as measured by both and positive coefficients regressing bank risks (total
the ratios between NPLs and total loans and between risk, idiosyncratic risk and systematic risk) over CEO
operating expenses and total assets. They also ownership percentage. This result can be justified by
justify this result by arguing that the significance of showing that as the percentage of bank CEOs
concentrated ownership could suggest better shareholdings increase, their risk preferences
monitoring by the block-holders. This is consistent coincide with bank shareholders and so increases
with Azofra and Santamaria (2011) who investigate bank risk. Berger et al. (2012) find that high
Spanish banks. Lately, Grove et al. (2011) do not shareholdings of CEO, lead to a reduction of banks
provide much support that concentrated ownership probability of failure. This is also consistent with
lead to positive effects on banks performance. Aebi et al. (2012). Rachidi et al. (2013) find that a
Indeed, the authors find a weak association between lower CEO ownership has no significant effect with
the two variables. Contrariwise, Beltratti and Stulz all measures of risks. Another dichotomy concerning
(2012) show a strong relationship between ownership structure, is related to state owned banks
concentrated ownership and bank risk-taking and private sector institutions. As resulted by this
especially during the recent financial crisis in US. survey, many authors investigated this issue in the
Following this view, Busta et al. (2014) focusing on last decade. Berger et al. (2005) explore the effects of
data of European banks over the period 1993-2005, domestic, foreign, and state ownership on bank

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performance of Argentinian banks during 1990s. executives' performance (Berle & Means, 1932;
The authors obtained strong and robust result Holmstrom, 1979; Grossman & Hart, 1983; Murphy,
showing that state owned banks have poor long- 1985). Moreover, following this theory an executive
term performance (static effect), those undergoing compensation structure is optimal when managers
privatization had particularly poor performance are motivated to encourage only risk increasing but
beforehand (selection effect), and these banks positive NPV projects (Jensen & Meckling, 1976;
dramatically improved following privatization Amihud & Lev, 1981; Smith & Stulz, 1985). From an
(dynamic effect). Similar results are obtained by Kim opposite perception, the development of the
and Rasiah (2010) by exploring a sample of literature outlines the managerial power theory that
Malaysian banks. Barry (2011), investigate this issue states that the composition of incentive pay is
in a sample of European banks and find that publicly perceived as a mechanism that misaligns executives'
held banks do not affect risk-taking when changes in interests from those of shareholders (Bebchuk et al.,
ownership structure occur. Focusing also on a 2010). Indeed, as further investigated, there is a
sample of European banks Iannotta et al. (2013) and wide consensus in the literature regarding executive
try to relate state ownership with bank risk as compensation that its level and composition may
measure by default risk and operating risk. They increase the risk-taking behavior of bank managers.
analysis show different results, one of the most This is the reason why both principle setter and
relevant is that government owned banks resulted to regulators identify it as a critical issue in banks'
face lower default risk, but higher operating risk. soundness and stability. In particular, it should
Recent studies investigate the relation between include procedures to avoid conflicts of interest and
institutional shareholding and bank risk-taking with should also encourages employees to act in the
results again not conclusive. Barry et al. (2011), interest of the company as a whole. Moreover,
Erkens et al. (2012) and Ellul and Yerramilli (2013) incentives embedded within remuneration
show that that financial firms greater institutional structures should not promote excessive risk-taking
ownership is associated with increases in risk-taking (BCBS, 2015).
strategies of banks. Contrariwise, Knopf and Teall As noted above, a wide strand of the literature
(1996) and Ferri (2009) report opposing findings, states that higher (potential) compensation in
and this difference may be linked with the period of banking institutions lead to higher risk-taking
observation. Finally, a few studies assess the impact behavior (Houston & James, 1995; Adams & Mehran,
of regulation on banks ownership structure. In 2003). Moreover, executives' incentives have also
particular, Caprio et al. (2007) and Laeven and been identified as a driver of the recent financial
Levine (2009a; 2009b) investigate this issue and find crises of 2008 by several scholars (e.g., Kashyap et
evidence that bank regulation may increase or al., 2008; Kyrkpatric, 2009; Bebchuk et al., 2010).
decrease bank risk-taking, depending upon the Consistent with the managerial power theory, Gropp
ownership structure. Levine (2004) and Barth et al. and Kohler (2010) show that in their sample
(2004) argue that regulation policies may limit the consisting of 1100 banks from 25 OECD countries
impact of traditional governance mechanisms. The from 2000 to 2008, aligning the interests of
authors also point out that Governments in many managers and shareholders increases risk-taking of
countries restrict the concentration of bank banks. Nonetheless, as a matter of fact, the most
ownership and also impose limits on the purchase of important determinant of the effect of
shares by outsiders without regulatory approval. As compensation is its composition. Indeed, many of
a result, still there is not a clear answer about which the studies resulted by this survey are consistent
is the optimal ownership structure in banks. with the view that on the one hand equity linked pay
encourages risk- taking, contrariwise non-equity
2.3. Compensation linked pay makes CEOs more risk-averse. As
concerns equity linked CEO compensation, there
As a result of the analysis conducted in this paper, may be a moral hazard behavior since these
executive compensation is a hot subject for practices combine unlimited upside with limited
researchers especially in the aftermath of downside potential risk, resulting in convex CEO
2007/2008 financial crisis. This is also denoted by pay-off linkage with marginal increases in bank risk.
academicians and principle setters. For example, DeYoung et al. (2013) find a rapid increase of equity-
OECD (2017) states that "since the financial crisis, linked compensation in US banking over the last
much attention has been paid to the governance of decade and show that this practice is more linked
the remuneration of board members and key with higher risk in financial institution than in any
executives". Indeed, most of the literature regarding other industry. Moreover, the author state that CEO
executive compensation in the sample was compensation was changed to encourage executives
developed from 2011. Moreover, executive to exploit new growth opportunities created by
compensation has also become a topic of intense deregulation and debt securitization, but this is also
debate among principles setters (e.g. OCSE, 2015; a reason to incur in an increasing risk-taking
2017; BCBS, 2015; EBA, 2015), regulators (e.g. EP, behavior. In particular, banks' risk is measured by
2013), and media (e.g. Rajan, 2008; Rajan et al. pay-performance sensitivity (delta), which is related
2008), with a particular focus on CEO compensation. to stock grants, and pay-risk sensitivity (vega), which
Nonetheless, the evidence linking compensation is related to stock options grants. Findings of the
practices to the effect on banks' risks and authors asses that non-traditional banking income is
performance is mixed. Focusing on an agency theory strictly related to vega compensation. Similarly, Bai
perspective, executive compensation and especially and Elyasiani (2013) use CEO compensation
its variable part, is usually identified as one of the sensitivity to risk (vega) and pay-share inequality
mechanism used to align managers' and between the CEO and other executives as measures
shareholders' interests as well as to enhance of compensation. They aim to investigate the

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relationship between default risk and executive in terms of ROE. Closely to Fahlenbrach and Stulz
compensation for BHCs over the 1992–2008 period. (2011), Erkens et al. (2012) find that banks which
Some of the most important findings deriving by performance was worse during the financial crisis
their analysis are: CEO compensation sensitivity to are those offering non-equity based pay for their
risk of BHCs has risen in response to deregulation; CEOs. An unclear view of the association between
higher CEO compensation sensitivity to risk lead to executives' compensation and bank performance is
greater bank instability; the association between given by Grove et al. (2011) and by Acrey et al.
bank stability and managerial compensation is bi- (2011). The first authors apply agency theory to the
directional; higher vegas induce greater risk and vice banking industry and adopt the factor structure by
versa. As mentioned above, regulating compensation Larcker et al. (2007) to measure multiple dimensions
structure is also a vital element in the risk-taking of Corporate Governance for 236 US public
behavior of bank executives. In particular, Webb commercial banks during the financial crisis. They
(2008) states that executive bank risk-taking due to investigate the effect of executive compensation on
remuneration structure is largely avoided when both banks' financial performance and loan quality,
regulatory monitoring is high. Hence, strict obtaining mixed result. Indeed, they find that the
regulatory framework is needed to preserve bank extent of incentive executive pay is positively
stability. Chaigneau (2013) analyses the effects of associated with financial performance (measured by
two regulatory mechanisms, namely a regulation of ROA of 2006 and 2007 and excess stock return of
the structure of bank CEOs incentive pay and 2006), but it is negatively associated with loan
sanctions for the CEOs of failed banks, on bank risk- quality (measured by the non-performing assets
shifting. The author argues that the current ratio of the average of the 2006–2008 period). They
regulatory approach, which largely attempts to align also capture the consequences of the mismatch
the interests of bank CEOs with those of their between incentive systems and RM with a lack of
shareholders, is flawed. Moreover, Chaigneau (2013) risk adjusted financial targets in executive
also suggests that banks' Corporate Governance compensation. From another perspective with
arrangements could be well-adjusted into two similar results, Luo (2015) examines the
alternative ways in order to ensure the efficiency determinants of executive compensation in Chinese
structure of bank CEOs incentives. First, the banking during 2005–2012. The author runs both a
regulator could let shareholders set both the level of 2 Squared Least Stages (2SLS) methods and a
pay and the level of incentives of bank CEOs, but it dynamic GMM regressions obtaining positive but no
would impose some constraints on the structure of significant relationship with pay performance of
their incentive pay. Second, the regulator could CEOs although his result show that ownership
threaten to punish the CEOs of failed banks. Any of structure (measured by ownership concentration
these two mechanisms would ensure (at no extra and ownership identification) and compensation
cost) that bank CEOs have efficient risk-taking committee are significant in determining the amount
incentives, although argued that the first mechanism of executive compensation. Actually, a wide
is more robust to modelling assumptions and compensation practice is to link CEO payment to
parameter uncertainty. Different compensation bank performance (Minnick et al., 2011). More
policies provide different ways of aligning specifically, this kind of cash bonus is usually
managerial and shareholder interests (Jensen & payable when earnings-based targets over at least
Murphy, 1990). Cunat and Guadalupe (2008) one year are achieved and the payoff increases up to
investigate the effect of product market competition a maximum cap. Harjoto and Mullineaux (2003)
on the compensation packages of banks' executives, investigate compensation strategies of commercial
distinguishing the effect on total pay, estimated BHCs during 1992–2000. One of their findings show
fixed pay and performance-pay sensitivities, and the that pay-for-performance sensitivities are strongly
sensitivity of stock option grants. Using a panel data larger for BHCs that have entered the underwriting
of US banks in 1990s, they provide a difference-in- business. Furthermore, and consistent with agency
differences estimation and find that deregulation theory, the authors find also that pay-for-
has had a significant impact on the level and the performance sensitivities decline generally at BHCs
structure of executives' compensation. In particular, as return variability increases. Continuing to follow
the variable components of pay increased along with an agency theory perspective, Cornett et al. (2009)
performance-pay sensitivities and, at the same time, look for a relationship between different Corporate
the fixed component of pay fell. Similarly, Mehran Governance mechanisms and both bank earnings
and Rosenberg (2008) report a significant impact of and earnings management by investigating data of
pay-risk sensitivity on risk-taking (measured the largest publicly traded BHCs in the US. During
respectively by volatility of stock returns and write their analysis, they find that the estimation of the
downs). Contrariwise, Fahlenbrach and Stulz (2011) three variables was biased by high endogeneity.
find no evidence of the relationship between bank Thus, they continue their study by using a
performance and both CEO incentives (and simultaneous equation approach and find that CEO
ownership) during the credit crisis, furthermore the pay-for-performance sensitivity, board
poor performance of banks during the crisis was the independence, and capital are positively related to
result of unforeseen risk. The authors investigate a earnings and that earnings, board independence,
sample of 98 financial firms, of which 95 are banks and capital are negatively related to earnings
over the period 2006-2008. In particular, they study management. In particular, as concerns pay-for-
whether US banks with CEOs, whose incentives were performance, the authors find interesting results: it
better aligned with the interests of their is positively related to both earnings management
shareholders, performed better during the crisis. and board independence, and the latter relationship
Their findings show that the banks in the sample is bidirectional. Livne et al. (2011) investigate the
performed worse both in terms of stock returns and role of Fair Value Accounting (FVA) outcomes in

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determining compensation amount of US bank CEOs, compensation in order to determine whether risk
finding a positive link between CEOs cash bonus and managers' activity effectiveness is related to a high
fair value (FV) accounting of both Held For Trading level of compensation.
(HFT) (managed for short-term profit) and Available
For Sale (AFS) assets. Hagendorff and Vallascas 3. METHODOLOGY
(2011) investigate the link between CEO cash
bonuses and bank risks by using the Merton
3.1. Sample
distance to default model on a sample composed by
US and European firms. They find that increases in
CEO cash bonuses lower the default probability of We perform a systematic review of the literature that
banks. Moreover, the authors find also that the risk- entails different steps:
reducing effect of CEO cash bonuses is mainly 1. Choose Business Source Complete and
related to stronger regulatory environments and for ScienceDirect2 as research databases.
non-distressed financial institutions. Similarly, Acrey 2. Select only papers published in journals with a
et al. (2011) investigate the relationship between peer reviewed evaluation process.
CEO compensation and bank default risk. They focus 3. Search in the keywords the combination of
in particular on short term incentives to study if the "Corporate Governance" and "banks" or "financial
latter could determine higher bank risk-taking. The institutions").
authors use early warning off-site surveillance 4. Restrict the sample to the articles related to Risk
parameters and Expected Default Frequency (EDF) as management, Ownership structure and
well as crisis-related risky bank activities, and find Compensation, because of their increasingly
that although compensation elements commonly attention received by Supervisors3.
thought to be the riskiest components (e.g. options 5. Ensure relevance of the articles by reading all
and bonuses) are either insignificant or negatively abstracts and survey remaining articles by a
correlated with common risk variables, and only complete reading in order to check for
positively significant in predicting the level of substantive relevance of the contents.
trading assets and securitization income. 6. Consolidate results.
Contrariwise, Thanassoulis (2011) applying a We obtain that the literature concerning the
theoretical model calibrated on US banking system selected topic is mainly focused on risks potentially
data, demonstrates that overall remuneration faced by banks and their performance capability.
represents a substantial expense for a bank which Specifically, Risk management, Ownership structure
therefore contributes to default risk significantly. and Compensation are normally investigated
Lastly, the author suggests that cap on the considering their impact on risks and performance
proportion of the balance sheet which can be used drivers. Indeed, Risk management function is
for remuneration can lower bank default risk. Tian responsible for identifying, measuring, monitoring,
and Yang (2014) also focus on incentive pay of US and recommending strategies to control and
banking CEOs and find a positive association with mitigate risks. It also reports on risk exposures of
bank risk-taking. In particular, they investigate a firms, so as to ensure a risk profile in line with the
sample composed by 179 financial institutions over Risk Appetite Framework (RAF) approved by the
the period 2005-2010 and distinguish commercial Board of Directors. As concerns executive
banks from non-commercial financial institutions compensation, it is related with risk since an
(respectively 123 and 56), and find a trend for inadequate compensation structure may lead to
commercial bank CEOs to switch from cash bonuses excessive risk-taking. Finally, there is a wide strand
into other forms of incentive compensation, if more of literature that relates risk and performance to the
desirable. Bhagat and Bolton (2014) conduct a study ownership structure and its concentration.
on 14 of the largest financial institutions during
2000–2008. They focus different on features of CEO 3.2. Meta-analysis
compensation (CEO's purchases and sales of their
bank's stock, their salary and bonus, and the capital In order to have a complete understanding on the
losses CEOs incur due to the dramatic share price evolution of literature on corporate governance of
declines in 2008) and consider three measures of banks, a meta-analysis methodology is applied,
risk-taking (Z-score, the banks' asset write-downs, following Hunter et al. (1982). The latter is a
and whether or not a bank borrows capital from FED systematic method that seeks to reconcile the
bailout programs, and the amount of such capital). findings of prior researches on a specific topic
Their results agree with the analysis of Bebchuk et (Souissi & Khlif, 2012). This methods entails a two
al. (2010) and assess the correlation between steps procedure: firstly, running the model to have
incentives generated by executive compensation an overall overview on the prevailing sign of the
programs and excessive risk-taking by bank. The
authors also propose a compensation structure for 2
Business Source Complete and ScienceDirect are chosen since they are two
senior bank executives: executive incentive of the leading databases for economics and management literature
remuneration should only contain restricted stock researches (Berggren and Karabag, 2012). I conduct an advanced research
and restricted stock options. This kind of structure on these two sources, leading to diffrent results. For instance, the advanced
will properly fit the long-term incentives of the
search for the combination of the words "corporate governance" and "banks"
senior executives with the interests of the
in the keywords of the articles published in only academic peer reviewd
stockholders. Even though most of the literature
journal in English language on ScienceDirect returned 253 results, 231 on
regarding executives' compensation in banking is
Business Source Complete.
especially referred to CEOs, a few recent studies 3
(Keys et al., 2009; Aebi et al., 2012; Ellul & Yerramilli, as mentioned in the introduction, and also confirmed in the 15 Corporate
2013) are focused also on Chief Risk Officers (CROs) governance principles for banks issued in 2015 by BCSBS which address
these topics in principles 1-8 and 11.

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 Corporate Ownership & Control / Volume 16, Issue 1, Autumn 2018, Continued - 1

relationship between corporate governance and the where M is the weighted mean:
independent variables (e.g risk and performance);
then, running the analysis over specific corporate ∑𝑘𝑖=1 𝑊𝑖 𝑌𝑖
governance feature as identified by homogenous 𝑀=
∑𝑘𝑖=1 𝑊𝑖
subgroups of variables (related to risk management,
ownership and concentration), to clearly determine Then, with the 95% level of confidence, the
the relation in-between. We also test for the lower and upper limits will result as: 𝐿𝐿𝑀 = 𝑀 −
consistency across the sample, by checking for 1.96 ∗ 𝑆𝐸𝑀 and 𝑈𝐿𝑀 = 𝑀 + 1.96 ∗ 𝑆𝐸𝑀 .
heterogeneity with the statistics proposed by The meta-analysis is run over the results
Higgins and Thompson (2002) and Higgins et al. obtained in previous academic papers related to
(2003): Ownership structure of banks and their corporate
𝑥 2 − 𝑑𝑓 governance, since the methodology requires a
𝐼2 =
𝑥2 minimum number of papers to be included in the
sample which have also to be homogeneous in terms
where is 𝑥 2 the 𝑥 2 statistics and 𝑑𝑓 is its degrees of of methodology. Thus, the meta-analysis is not
freedom. This allows to compute the portion of the comprehensive of all the research areas investigated
variability that is due to heterogeneity rather than in this paper but it is only focused on the relation
sampling error. Over the total sample, we obtain between Ownership structure and both banks'
𝐼2 = 0.92, which means that 92% of the variability is performance and risk. The other research areas (e.g.
due to heterogeneity and the studies included in the Risk management and Compensation) have been
sample cannot be considered of the same analyzed with the systematic literature review as
population. above presented.
The heterogeneity issue is then addressed in
two different ways: performing a random effects
4. RESULTS
model which assumes a Gaussian distribution to
identify the effects of the different studies (Fleiss &
Gross, 1991; DerSimonian & Laird 1985; Ades & 4.1. Ownership and performance
Higgins, 2005; Higgins et al., 2009); running the
subgroup analysis, as above explained, which looks At first, we run the meta-analysis over the sample of
also for interactions in each selected subgroup. To paper that analyze the relationship between
the first point, the random effects model is run at a Ownership structure and bank performance. The
95% confidence level, with the underline assumption results of the analysis are summarized in Figure 1
that the true effect may be different over the sample and Table 1, which show respectively the forest plot
(Borenstein et al., 2009). of the meta-analysis and the output table. Figure 1
The proposed model is based on Pearson's clearly shows that overall relationship between
correlations between independent and dependent Ownership and performance is positive, strong and
variables assuming a bi-variate correlation analysis. significant. This may be understand by looking at
Since Pearson's correlation is bounded the last line of the Forest plot, which represents the
between -1 and 1, we also need to correct the weighted average effect size or “summary effect”
skewness for sampling distribution for highly and estimates the intervals in which the effect will
correlated variables. Thus, we compute a Fisher’s r- most probably lie.
to-z transformation (Fisher, 1921) to the Pearson's Indeed, most of the confidence intervals are on
correlation coefficient in order to transform the the positive side of the x-axis. This lead to assert
skewed distribution (r) into a distribution (z) that that there is a widely diffused finding in the
may be considered as a Gaussian distribution, with literature on Ownership structure in banking, which
its variance coefficient independent from the initial is found to be relevant in increasing bank
computed correlation. This is done by estimating the performance. In order to understand the in-between
standard error using the sample size of each study: relations of the variables investigated, Figure 2 and
Table 2 show the results of the subgroup analysis. In
1 1+𝑟 particular, selected papers are focused on the
𝑧 − log relation between banks performance and four
2 1−𝑟
different types of ownership: Board ownership
with 𝜇𝑧 = 𝜇 and 𝜎𝑧 =
1
(where n is the sample (which is the portion of capital owned by directors
√𝑛−3 of the banks); CEO ownership; Controlling
size). shareholder (which is the percentage of capital
Under the assumption of random effects, each owned by the controlling shareholder); State
study has an assigned weight equal to W that is ownership. The subgroup analysis identify Board
calculated as follows: ownership, CEO ownership and Controlling
1
𝑊𝑖 = shareholders as positively related to banks
𝑉𝑦 performance, with positive correlation coefficients
(respectively equal to 0.04, 0.29 and 0.12). The most
where 𝑉𝑦 is the within-study variance for the i-study significative relationship is found with CEO
plus the between-studies variance: ownership, since the confidence limits are very small
and both in the positive side of the x-axis (CI lower
𝑉𝑦 = 𝑉𝑦𝑖 + 𝑇 2 limit is 0.24 and CI upper limit is 0.33). Conversely,
State ownership seems to be significantly negative
Lastly, we calculate the variance and the related to banks performance, with a correlation
estimated standard error of the overall effect, coefficient equal to -0.18 and CI in the range (-0.24:-
respectively as: 𝑉𝑀 = ∑𝑘
1
and 𝑆𝐸𝑀 = √𝑉𝑀 , 0.12).
𝑖=1 𝑊𝑖

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Figure 1. Ownership and performance overall Figure 2. Ownership and performance – Subgroup
analysis
-0,40 -0,20 0,00 0,20 0,40 0,60 -0,60 -0,40 -0,20 0,00 0,20 0,40 0,60
0 0
1 1
2 2
3 3
4 4
5
5 6
6 7
7 8
8 9
9 10
10 11
11 12
12 13
14
13 15
14 16
15 17
16 18
17 19
18 20
19 21
20 22
21 23
24
22 25
23 26
24 27
25 28
26 29
27 30
28 31
29 32
33
30 34
31 35
32 36
33 37
34 38

Table 1. Ownership and performance overall

Number CI CI CI
Study Correlation Variance Standard Weight Weight ES CI Bar
of Lower Upper Residuals Bar
number (z) (z) error (z) (random) % Forestplot LL
subjects limit Limit UL
1 -0,13 110 0,00935 0,1 23,04 -0,31 0,06 0,03 -0,3 -0,13 0,18 0,19
2 -0,23 349 0,00289 0,05 27,07 -0,33 -0,13 0,03 -0,4 -0,23 0,1 0,1
3 0,34 218 0,00465 0,07 25,84 0,21 0,44 0,03 0,18 0,33 0,12 0,11
4 0,34 214 0,00474 0,07 25,78 0,2 0,45 0,03 0,18 0,33 0,13 0,12
5 0,23 211 0,00481 0,07 25,73 0,1 0,35 0,03 0,07 0,23 0,13 0,12
6 0,23 215 0,00472 0,07 25,79 0,1 0,35 0,03 0,07 0,23 0,13 0,12
7 0,23 208 0,00488 0,07 25,69 0,1 0,36 0,03 0,07 0,23 0,13 0,13
8 -0,04 634 0,00158 0,04 28,06 -0,12 0,04 0,03 -0,21 -0,04 0,08 0,08
9 -0,19 213 0,00476 0,07 25,76 -0,31 -0,05 0,03 -0,36 -0,19 0,13 0,13
10 -0,06 1 534 0,00065 0,03 28,81 -0,11 -0,01 0,03 -0,23 -0,06 0,05 0,05
11 0,17 288 0,00351 0,06 26,62 0,06 0,28 0,03 0 0,17 0,11 0,11
12 0,05 1 356 0,00074 0,03 28,74 0 0,1 0,03 -0,12 0,05 0,05 0,05

Table 2. Ownership and performance – Subgroup analysis

Subgroup name Correlation CI Lower limit CI Upper limit Weight I2 T2

Board Ownership 0,04 -0,15 0,23 0,24 0,91 0,02
CEO Ownership 0,29 0,24 0,33 0,25 0,89 0,03
Controlling Shareholders 0,12 -0,06 0,29 0,25 0,66 0
State Ownership -0,18 -0,24 -0,12 0,25 - -
Combined effect size 0,07 -0,13 0,26 0,92 0,03

4.2. Ownership and risk Figure 4 and Table 4 report the output of the
analysis. In this case the subgroups are CEO
The second investigation is performed over the ownership, Controlling shareholder and State
sample of papers that analyze the relationship ownership. The correlations coefficients are negative
between Ownership and risk. in all the three cases, but the confidence intervals
The overall analysis shows a significance of the are very large, thus unavailing to draw significance
results weaker than previous related to ownership conclusion of the investigation. The most significant
and performance. Indeed, the Forest plot reported in result is obtained for the Controlling shareholder
Figure 3 and Table 3 show that there is not a subgroup, which seems to increase of bank risk (as
predominant result in previous academic researches confirmed by the positive correlation equal to 0.04
on this topic. The results of the subgroup analysis and the CI limits respectively at -0.03 and 0.10).
confirm that most of the academic are inconclusive.

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Figure 3. Ownership and risk overall Figure 4. Ownership and risk - Subgroup analysis

-0,4 -0,2 0 0,2 0,4 -1 -0,5 0 0,5 1

0 0
1 1
2 2
3 3
4 4
5 5
6
6
7
7
8
8
9
9
10
10 11
11 12
12 13
13 14
14 15
15 16
16 17
17 18
18 19
19 20
20 21
21 22
23
24

Table 3. Ownership and risk overall

Number CI CI CI
Study Correlation Variance Standard Weight Weight ES CI Bar
of Lower Upper Residuals Bar
number (z) (z) error (z) (random) % Forestplot UL
subjects limit Limit LL
1 -0,2 349 0,00289 0,05 63,73 -0,3 -0,1 0,06 -0,22 -0,2 0,1 0,1
2 0,18 96 0,01075 0,1 42,46 -0,02 0,37 0,04 0,17 0,18 0,2 0,19
3 0,02 298 0,00339 0,06 61,76 -0,09 0,13 0,06 0 0,02 0,11 0,11
4 0,09 1 534 0,00065 0,03 74,33 0,04 0,14 0,07 0,07 0,09 0,05 0,05
5 -0,13 288 0,00351 0,06 61,31 -0,24 -0,01 0,06 -0,15 -0,13 0,11 0,12

Table 4. Ownership and risk - Subgroup analysis

Subgroup name Correlation CI Lower limit CI Upper limit Weight I2 T2

CEO Ownership 0,04 -0,16 0,23 0,29 0,96 0,01
Controlling Shareholders 0,04 -0,03 0,1 0,39 0,52 0,01
State Ownership -0,15 -0,69 0,5 0,31 0,52 0
Combined effect size -0,02 -0,15 0,11 0,84 0,01

5. CONCLUSION under the managerial power theory the executive

incentive pay is perceived as a mechanism that
There is an increasing understanding of the misaligns executives' interests from those of
fundamentals of bank Corporate Governance such as shareholders (Bebchuk et al., 2010). However there is
risk management, ownership structure and a wide consensus on the possible increase the risk-
compensation. This results from both banking and taking behavior of bank managers as an effect of
institutional perspective. The methodology entails a higher compensations. Lastly, the meta-analysis on
systematic literature review of the papers focused ownership show an interesting result in the
on this topic, and a meta-analysis assessment of assessment of previous academic findings. In
previous academic findings on the relation between particular, even though any conclusion may be
Ownership and both risk and performance of banks. drawn for the association between ownership and
As concerns risk management, the systematic risk, there is a clear and significant result obtained
literature review finds it is receiving increasing by investigating the relation between ownership and
attention from academics since the crisis, and shows bank performance. The subgroup analysis clearly
that published papers still present mixed result. The shows that Board ownership, CEO ownership and
prevailing academic debate on compensation in bank Controlling shareholder enhance the performance of
is based on an agency theory that states executive banks. Conversely, State ownership is negatively
compensation - and especially its variable part - is associated with bank performance. However, there
usually identified as one of the mechanism used to are some shortcoming associated with this
align managers' and shareholders' interests as well methodology. The most important is a sample
as to enhance executives' performance (Berle & selection bias (e.g. heterogeneity or “apples and
Means, 1932; Holmstrom, 1979; Grossman & Hart, oranges” issue as in Higgins & Thompson, 2002).
1983; Murphy, 1985). Nonetheless, also in this case which unable the results of the meta-analyses to be
there is not an univocal consensus on the relation used with the aim of drawing general conclusion for
between compensation and performance. Indeed, the explored topic. From a methodology point of

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view, a further sensitivity analyses may be in this field may also further investigate the cross-
performed to verify if different selection criteria or country differences in the relation between
different assumptions in the procedure lead to corporate governance and both performance and
different findings (Lagasio & Cucari, 2018). Scholars risk in banking.

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