Andrea Paci

Corporate Governance in Banks

Manuscript Type Review Research Question/Issue We survey the literature on corporate governance in banks in the US and international settings. We discuss how the specialness of banks, deposit insurance, high bank leverage, and bank regulation interact with bank governance. We evaluate bank governance from three perspectives: (1) maximizing bank equity value, (2) maximizing total enterprise value, and (3) maximizing social objectives. Our survey includes evidence on how bank governance differs from that of manufacturing firms. We also survey studies on managerial incentives in banks and their implications for bank performance and risk taking before and during the 2007–2008 financial crisis. Research Findings/Insights The high leverage (usually above 90 percent) of banking institutions gives rise to a trade-off between strengthening equity governance and maximizing enterprise value. Aligning managers very closely with shareholders can give rise to strong incentives for risk shifting to the detriment of firm value. The bank risk choices might also go against the societal objectives of a stable financial system. Theoretical/Academic Implications We provide a framework for the optimal design of bank governance and bank regulation, considering the objectives of both depositors and society-at-large in addition to those of bank shareholders. This framework could be especially important in determining risk choices by banks and the effects of such on the stability of the financial system. Practitioner/Policy Implications Our analysis of the literature surveyed has policy implications for bank regulation, top-management compensation in banks, and directives for design of governance in banks. We discuss implications for direct regulation of banks and regulation of bank governance. The findings surveyed provide guidance for board independence, board size, board composition, and incentive features in top-management compensation.

The Role of the State as Controlling Shareholder in the Telecoms: Incentive versus Entrenchment Theory

In this study we investigate the role played by the state as controlling shareholder in setting CEO incentives. Analyzing listed telecommunication companies from 13 European countries during 1999-2013, we measure the difference between the state and a private dominant shareholder in setting CEO compensation packages. We find that state control curbs the level of CEO compensation and this effect weakens as the state’s ownership stake increases. When we focus on CEO incentive compensation, we report that CEO pay for performance sensitivity is higher for state controlled firms than for private firms. However, as the state’s ownership stake increases, differences in sensitivity tend to disappear, but the effect of governance variables commonly used to proxy entrenchment becomes statistically significant.