Corporate governance in Romanian banking system: does board of directors' characteristics influence banks' business strategy.

• Author: Stefanescu, Cristina
• Position: Report

1. INTRODUCTION

   Even if the concept of corporate governance in banking system is a relative new one, it seems to be very important due to its main purpose: governing a business in the best possible manner. Stating from its most simple definition--corporate governance is made of a set of relationships between bank's management, its board, its shareholders and other stakeholders--we could assert that the board of directors plays a key role in assuring a banking environment characterized by efficiency, mitigation of risks and a continuously increasing stability.

   The role of the board as regards the corporate governance in banks is not only specific, but also important at operational level for an institutional key player involved in bank governance and risk management. Unlike the other institutional key players (shareholders, executive management, audit committee/internal audit), the board of directors does not have just a critical role; trying to summarize in a few words its main responsibilities we could assets that it sets policies, monitors effects and approve changes (Greuning and Bratanovic, 2009). So, the board of directors is the one who sets the strategic direction, appoints management, establishes operational polices and, most important, takes responsibility for ensuring the soundness of a bank.

   The board of directors as an issue of corporate governance has been the subject of various international research papers, focused especially on the relationship between the board and bank's value, a short overview of these being detailed in the literature review part of this paper.

   Starting from the board's main role in a bank's activity and basing on the previous studies about its influence on a bank's value, we considered that a research focused on the relationship between the board of directors and the bank's strategy is not only made to quantify their interdependence, but also a new and original idea.

2. AIM OF THE STUDY AND RESEARCH METHODOLOGY

   Our empirical research is focused on the Romanian banking system and is aimed to investigate the relationship between the board of directors and their business strategy as far as net interest income is concerned. We chose for our study a sample of credit institutions that are running their activities in our country, depending on the availability of information needed on their websites, which was the main source of information for our research (approximately 80% of the total number of banks).

   We tried to identify several characteristics of the board of directors which might have an influence over the main source of banks' incomes. The factors selected for the analysis are the following: percentage of foreign board, percentage of male / female board, size of board and independence of board. The mean of each factor, their construction and possible values are detailed in the chapter dealing with the empirical analysis.

   In order to reach to a conclusion, we made an analysis using various statistical tools (descriptive statistic, correlations and regressions), which are also explained within the empirical analysis part of the paper. Finally, we concluded our study by creating a function of regression to express the influence of each considered independent factor over the dependent one.

   The findings of our study, which come from analyzing the relationship between the board of directors and banks' business strategies, are correlated to the literature review, but as every other research, our paper has some limitations, too, which offer us outlooks of future research. The main limitation is related to the influence factors selected for this analysis, but also to other possible correlations between the board of directors and other financial indicators.

3. LITERATURE REVIEW

   Recent studies focused on corporate governance showed that it plays a different role due to the specific of these organizations, especially to the existence of some difficulties (such as their liquidity, opacity, complexity and particular regulation), which involve other elements than the usual corporate governance mechanism implies (Mulbert, 2009; Heremens, 2007; Morgan, 2002; lannotta, 2006; Flannery et al., 2004; Adams and Mehran, 2003; Westman, 2009; Boot and Thakor, 1993; Santomero, 1997; Macey and O'Hara, 2003; Ciancanelli and Reyes, 2001; Levine, 2004; Prowse, 1997, La Porta et al., 2002).

   According to these studies, banks are highly leveraged, their liquidity function is characterized by a maturity mismatch between assets and liabilities, which might create problems in case of a run, no matter who initiates the withdrawal: small depositor (the case of Northen Rock) or other creditors--financial institutions (the case of Merril Lynch).

   Also, the nature of their assets mainly made of securities, such as Asset-Backed Securities (ABSs), Collateralized Debt Obligations (CDOs) and Credit-Default Swaps (CDSs) is different than those of legal entities and not readily observable (Mulbert, 2009). This opaqueness of bank's balance sheet was considered the main cause of the financial turbulence appeared in the autumn of 2008, which also lead to the collapse of Lehman Brothers, making even banks themselves to find it difficult to assess the riskiness of other banks accurately.

   Another aspect, particular to credit institutions is the wide range of stakeholders (Westman, 2009). In this respect, according to the Basel Committee on Banking Supervision (2006), "good corporate governance should meet the obligation of accountability to their shareholders and take into account the interests of other recognised stakeholders"--the supervisory authorities (Boot and Thakor, 1993), the government, the depositors (Macey and O'Hara, 2003).

   Another particularity of banks, which was the main source of inspiration for our theme research, is the combination of traditional operations (interest income based operations, such as taking deposits and issuing loans) and non-traditional banking operations (commissions and fee-based operations, such as securities trading and underwriting), which has created new challenges in bank corporate governance (Westman, 2009). A study conducted in this respect (Boot and Schmeits, 2000) proved that increased transaction orientation of banks has opened up new opportunities for cross-subsidisation from relatively low-risk relationship banking activities to more risky trading activities.

   For all these reasons, credit institutions are subject to more intense regulation than other entities, because of their systemic importance and vulnerability to runs, as they are responsible for safeguarding depositors' rights and guaranteeing the stability of the payment system. Thus, the purpose of a stronger regulation of credit institutions is to limit the amount of risk a bank may take. In these respect, the Basel Committee on Banking Supervision (2006), under its 1st Pillar stipulates the risk-adjusted minimum capital requirements, closely linked to the bank's assets adjusted to risk.

   Sometimes, regulation might create conflict within different parties implied in the corporate governance process. Such situations appear when regulation imposes bank ownership restrictions (Prowse, 1997; Macey and O'Hara, 2003), when it reduces operations allowed to banks or when applies coefficients that lessen competition in order to discipline them (Ciancanelli and Reyes, 2001) or to pursue regulators' interest--to maintain a sound financial system (Boot and Thakor, 1993). The most important of all, comes from the main aim of the regulatory authority (to reduce systemic risk) which is totally opposed to shareholders' main goal (to increase the share value).

   In this context, the most...