Agnieszka Słomka-Gołębiowska

The Effect of Remuneration Committee Independence on the Pay–Performance Relationship: Evidence from the Banking Industry in Poland

This article seeks to ascertain the impact of remuneration committee independence on the level of bank executive compensation in the context of the presence of a large blockholder, based on unique hand-collected panel data for all banks listed on the Polish stock exchange between 2005 and 2013. The recent postcrisis European Commission recommendation requiring banks to have independent board members on their remuneration committees does not necessarily reduce the level of executive pay or make incentive contracts more efficient. The findings show that executives of banks with a controlling shareholder and a greater number of independent board members on their remuneration committees are paid above the average for the sample. This excessive executive compensation may be interpreted as evidence of a violation of the rights of minority shareholders and depositors. The findings are consistent with managerial power theory.

Are the Corporate Governance Standard in Banks in the CEE Countries Low Hanging Fruit

The dominance of foreign capital in banking sector in the CEE countries created vulnerabilities that have been a contributing cause of recent financial crisis in the region. The question is whether the corporate governance structure of banks seemed to constrain or rather stimulate the potential unfavourable scenario, in which the controlling investors would be improving their difficult financial situation at the cost of their subsidiaries during the financial crisis of 2008. The aim of the study is to evaluate corporate governance practices in banks that were listed on stock exchange during the financial crisis 2007-2009 in selected CEE countries: Czech Republic, Hungary and Poland. Those three economies managed to maintain relatively strong position of banking sector during the recent financial crisis in contrast to many Western and some Eastern countries. The quantitative and qualitative analysis focuses on structure and practice of supervisory board based on data gathered from survey sent to the banks, their financial statements, reports on corporate governance and supervisory boards’ report on their activities. The results of the research may be of interests not only to academics, but also to managers, in particular in banks, and regulators. The research confirms that banks in CEE continue being role models for non-financial companies in implementing good standards of corporate governance. The findings reveal that bank’s supervisory boards in the selected CEE countries during the financial crisis of 2008 met the high standards of corporate governance with regard to the number of independent members, appointing independent member on the position of the chairman and chairman of audit committees. The study shows that during the crisis banks in the CEE countries themselves strived for improving corporate governance practices and they made some effort to implement post-crisis recommendations related to establishing risk and remuneration committees and appointing Chief Risk Officer. Banks listed in the Czech Republic and Hungary lag behind those listed in Poland with respect of frequency of audit committee meetings and supervisory board’s engagement in risk management. Increasing number of board committees with larger number of seats for independent board, provided that they do not have majority votes, can be implemented fairly quickly and relatively inexpensively. However the factual improvement of corporate governance of banks depends on professional qualities of the independent board members, their level of engagement in committee activities as well as their ability and willingness to challenge the existing contractual arrangements, in particular those that undermine the position of minority shareholders or other stakeholders such as depositors. It seems that implementing high corporate governance standards with regard to board composition and its committees is just low hanging fruit and could not have significant impact on the potential unfavourable scenario, in which the controlling foreign investors would be improving their difficult financial situation at the cost of their subsidiaries based in Poland. Implementing regulation recommended by the international organization such as European Commission that are well suited for large widely held corporations will not improve corporate governance standards of banks in countries where their ownership structure is closely held.

Is the Independence of Compensation Committee a Substance or a Symbol in the Closely Held Financial Institutions

The view that independence of compensation committee is important to promote shareholders interests has been reflected in most of the local corporate governance codes. Since the onset of the financial crisis from 2007-2009 the rules entered into the mandatory provisions of law for banks, despite the fact that the results of empirical research are not stable. The aim of the paper is to ascertain the impact of compensation committee independence on the level of banks executive compensation based on the hand-collected data from the banks financial accounts from Poland for the period 2005-2011. The empirical results show that regulation obligating to have independent board members on the compensation committee may not reduce level of pay or achieve efficiencies in incentive contract. The findings show that banks executive remuneration is linked to banks performance. However, the results also reveal that executives at banks where there is a greater number of independent board members in the compensation committee are paid above the market. The excessive executive compensation may be evidence of minority shareholder and depositors’ violation. Hence, the ratio of independent board members on the compensation committee cannot be attributed to the high quality corporate governance standards.

Have Banks Filled the Gap

Poland, as any other transition country, suffers from inefficient corporate governance, and thus firms may have difficulties with obtaining external financing. This paper aims to examine whether banks involvement in corporate control measured by having a bank member on the firms supervisory board reduces information asymmetries, and hence lessens firms financial constraints - phenomenon frequently measured by investment-cash flow sensitivity. In the sample of all non-financial companies listed during 1999-2002 on the Polish stock exchange firms with a banker on the board rely more heavily on bank loans than on internal capital in their investment activities. In contrast, firms with no banker on the board finance to a larger extent their investment with internal capital than with credit. It shows that bank loans are more important source of financing for firms with personal bank ties than for firms without such ties. However, firms with a close relationship with bank-creditor are almost as much financially constrained as firms without bank representative on the board. Hence, the research outcome is not stable and may indicate that banks in Poland might not yet manage to decrease information asymmetries between themselves and borrowers by delegating their representatives to a debtors supervisory board.