In quest of increased accountability in the banking sector : exploring the power of trust within the owner-director relationship : the case of one financial cooperative

Corporate governance is a field of huge practical importance. Especially, when it comes to studying the governance of banks. The aim of this research is to identify structural and relational avenues likely to promote increased accountability on banks’ board of directors. In doing so, we first shed light on the structural characteristics of so-called investor-owned banks triggering corporate governance issues and more particularly, rendering agency prescriptions inadequate and often promoting pervasive consequences in the sector. We claim that high opacity of investor-owned banks’ activities coupled with sharp incentives for increased risk-taking fosters systemic instability in the banking sector. In our quest of a model of bank more susceptible to host sound corporate governance practices, we turn the spotlight to financial cooperatives. The financial cooperative model, while displaying unique corporate governance facets, has received seldom-academic attention compared to the investor-owned model. Financial cooperatives’ ownership structure, namely customer-ownership, allows these banks to operate in a framework with limited incentives for abusing the State deposit guarantee. Combined with a traditional focus on retail-banking activities, cooperatives have remained strongly connected to local communities, reducing informational asymmetries and offering more adapted financial services for their members. However, these last decades, under the impulse of regulatory reforms, financial cooperatives have tended to grow much like investor-owned banks did. They expanded their activities to non-retail ones and extended their ownership to non-members so as to be capable of competing with classic investor-owned banks. Since we believe the most central aspect of cooperatives to be the active democratic involvement of members in the governance of their cooperative, and the full dedication of members’ representatives to meet their interests, we have had to fix a set of boundaries limiting the cooperatives’ business model so as to keep it as close as possible to its cooperative identity. Once the model of financial cooperative likely to enable high member engagement had been established, we started focusing on the owner-director relationship. Member participation is a central feature of the governance system of financial cooperatives. The question we asked ourselves was: “Can member participation exclusively be explained in the light of the dominant theory in corporate governance, namely the agency theory?” In other words, could participation or lack of it be explained based on an individual assessment of the costs of controlling the assumed opportunistic behavior of managers? Based on preliminary interviews and discussions, we were keen to believe that member participation encountered in financial cooperative did not fully match with the one assumed by agency theorists. Therefore, we searched for alternative motivations explaining member participation. Since we casted serious doubts on the rationale provided by the agency theory to explain member participation in the case of financial cooperatives, we explored the opposite claim of one of its roots assumptions: “What if member participation could be explained by their trust in the cooperative and their representatives?” This approach would lead us to provide support for an other theoretical framework assuming board directors to be pro-organizational stewards rather than intrinsically opportunistic agents. We quantitatively tested the effect of members’ trust in the cooperative and members’ trust in directors’ integrity on members’ participation to the governance of their cooperative. The statistics show positive and significant correlations between these two trust variables and significant explanatory power of members’ participation in the cooperative. More precisely, we found that members’ trust in the cooperative had a full and positive mediating effect on the relationship between members’ trust in directors’ integrity and members’ participation. These findings lead us to consider the effect of trust in directors to be more or less significant depending on the trust members have in the guarantees provided by the institution. A trustworthy director operating in an untrustworthy financial institution would not lead to increased member participation. On the opposite, trustworthy directors are found to be more likely to contribute to member participation in institutions that are perceived as trustworthy for their members. But one may ask: “Why should it be so important to see trust arise in the owner-director relationship?” We were keen to assume that member participation rooted in prior trust in directors and the cooperative was likely to promote increased accountability on banks’ board of directors. On the basis of one semi-structured interview, we were able to collect support for the assumption that member participation rooted in prior trust and not mere controlling behavior potentially leads to increased accountability of board directors. The basic assumption behind this intuition is that whenever people (here: directors on board) feel they are not trusted and that they are incentivized to behave in specific ways, they will be more likely to act opportunistically than people who feel they are trusted and connected with those parties who claim to accountability. In other words, trusting behavior triggers participation-accountability cycles promoting safe and stable governance practices in financial cooperatives. These findings advocate the need of further exploring the corporate governance of financial cooperatives, as we believe it to be a relevant model of bank allowing for stable, democratic and responsible socioeconomic development. In this perspective, we invite national and international regulators to adopt legislations that allow their particular identity to develop and sustain. More particularly, the results of our analysis invite us to further explore the power of given financial cooperatives’ institutional guarantees in raising the trust between members and their elected representatives. These guarantees should promote positive member participation and in fine accountability on the board of directors. Again, further qualitative research is needed to support the relationship between positive member participation and increased accountability on the board of cooperative banks. In our paper we were only able to realize one semi-structured interview which provided support for this assumption. Last but not least, these findings support the need for theoretical pluralism in the field of corporate governance, as the framework provided by the agency theory clearly appears to be too limited to grab the complexity of banks’ governance. Stewardship theory, advocating for a pro-organization view of board directors, would also need to be further developed as the trust we identify in this paper is not given ex-ante and only based upon expectations of an individuals’ behavior. More exploration on the inner aspects of governance, for instance psychological and sociological factors, is needed if we want to get the big picture of organizations’ governance system.Master [120] en Ingénieur de gestion, Université catholique de Louvain, 201