Do supervisory enforcement actions affect board composition?

Abstract

Research Question/Issue Do enforcement actions impact banks' board composition? Based on a unique sample of sanctions imposed on Italian banks by the country's banking supervisory authority from 2009 to 2015, we investigate whether supervisory enforcement actions affect changes at the board level. Moreover, we examine whether changes at the board level after a sanction are effective in reducing the probability of further sanctions in the future. Research Findings/Insights The findings reveal that sanctioned banks change their board composition following a supervisory sanction. We further test whether these changes improve bank governance and find that, under certain conditions, they may reduce the probability that the board is sanctioned again. Robustness tests confirm the results. Theoretical/Academic Implications This study provides empirical evidence that supports the role of supervisory enforcement actions in inducing banks to adopt changes at the board level. Given that the relationship between supervisory sanctions and changes in board characteristics is still neglected, we contend that our results may increase the understanding of the effectiveness of enforcement actions in improving board characteristics. Practitioner/Policy Implications We believe that our results have policy implications by making a clear and concrete contribution to the ongoing debate on the revision of the principles for enhancing corporate governance and banking supervision.

Corporate governance hierarchies and the performance of commercial banks in Cameroon

“…monitoring top management, advising top management, and sanctioning managers (Cotugno et al, 2020; de Haan & Vlahu, 2016)…”

“…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).…”

“…The external mechanisms like the regulatory system by monetary and financial authorities is considered effective when they sanction banks in ways that increase their board of directors' turnover, reduce the board size, and increase the education of board members, as reported by Cotugno et al (2020) within the Italian context. This study was based on data collected over a 6‐year period from 2009 to 2015 which used a dataset of supervisory sanctions imposed on directors of large Italian banks.…”

“…These interests are the performance of banking institutions. The performance for banking institutions is measured, for instance, by the increase of returns on equity for shareholders (Westman, 2011), the increase of the salaries of employees, and adequate compliance with the regulations in force (Cotugno et al, 2020). The theories presented above and the variables adopted for this study are presented in Figure 1.…”

“…This is because they play a passive role in the governance of these financial institutions perceived as a supporting role. Furthermore, the study carried out by Cotugno et al (2020) on the supervision of Italian banks and the improvement of performance of internal governance from the period 2009 to 2015 incentivizes the effectiveness of corporate governance hierarchies of banks by showing that enforcement of sanctions and supervision through regulations increase the performance of banking institutions by making board of directors efficient, less sanctioned by authorities and likely to increase good credit and improve risk management in banks. Such performance therefore increases returns on assets and equity.…”