(Hugh Grove, 2011) builds up their research on a paper by (Larcker, 2007) which looks over various aspects of the corporate governance for 236 American public commercial banks. The data was a compilation from Equilar, Execucomp, Compustat, and CRSP which was taken for a period of 2005-2008. They used the data from 2005 for corporate governance to see its effect on the financial performance and loan quality in the years 2006-2008. The main variables that they covered eleven governance factors to captivate six banking factors the board of directors, stock ownership by executives and board members, block ownership, financial leverage, anti-takeover mechanisms, and executive compensation.
Looking at all the variables one by one starting with block ownership, it had a positive and favourable effect on the performance of banks. The reason behind this hypothesis was the more block ownership effects decision making in a good way for the directors who are mostly the officers of the organisation and it favours the bank as they are bound to make decisions which are for the betterment of the organisation. Second variable was the level of anti-takeover devices which showed a bad effect on the bank’s performance due to agency costs being hiked more than required which in turn will result in takeover being suffered due to it. Third variable is the level of debt in a bank’s capital structure which seemed to show a negative effect on the bank’s performance. This was explained as the debt holders lacked the remuneration to monitor the managers and which would eventually would add on to the agency problems. The fourth variable is the board size which is an important factor with reference to corporate governance, and it showed a concave relationship with bank’s performance. There have been contradictory views on this matter as some papers argued that the bigger board size hindered the bank’s performance while some argued in favour of it. But (Hugh Grove, 2011) exhibit that its related to a point where it is okay to have a bigger board size but after that point it worsens the bank’s performance. Fifth variable that they used was the insider representation which showed a negative relationship with the bank performance. The reason behind this as they showed is it creates asymmetry of information, which makes it more complex. The sixth variable is the duality of CEO which had to have a negative effect and is consistent with the expectations, and this is because it creates two leadership roles which hampers the discipline of the CEO resulting it into bank performing even worse. Average age of the director was the seventh variable which was used to measure the bank’s performance which showed a concave relationship. (Hugh Grove, 2011) argued that it is good to have experienced directors but upto a certain point and they might lack the technology understanding and their own performance also deteriorates as they grow older. The eighth variable also showed similar results due to almost the same reason as the busier that they get they are good to work to a certain point but exceeding that it will result in handling too much work, resulting into mistakes and confusion, which will reduce the performance of the bank. Board meeting frequency is the ninth variable which showed a positive impact on the bank’s performance as it creates efficiency and regularity in terms of working for the greater goal. The tenth variable is the affiliated board committee which shows a negative effect on the performance of the banks. This is because the monitoring ability of the directors gets compromised due it. The eleventh variable is the compensation mix which is also the last variable used by (Hugh Grove, 2011), which showed a positive impact on the bank’s performance. Although, the other papers show different outcomes relating the compensation to negatively affect the performance of banks. (Hugh Grove, 2011) justify it as the compensation packages increase the motivation which in turn results into enhancing the bank’s performance.
The methodology used by (Hugh Grove, 2011) mostly by running the regressions and by taking the values such mean, median, standard deviation, minimum and maximum. They also used control variables by taking the proxies for natural log of total assets and opportunity to grow. (Hugh Grove, 2011) did an analysis for the pre-crisis period and the crisis period for the comparison. It showed that an over powerful CEO was one of the main reasons for the banks to lead into risky positions, which led to degrading the performance of the firm. The end result was the banks separating their roles to improve the position of the bank and their services in terms of performance and functioning, with the governance kept stronger at each and every point.
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