DOES BANK INSTITUTIONAL SETTING AFFECT BOARD EFFECTIVENESS? EVIDENCE FROM COOPERATIVE VS. JOINT STOCK BANKS.

Manuscript Type: Empirical Research Question/Issue: The recent financial crisis revealed major critical issues at joint stock banks’ boards and governance while co-operative banks showed higher resilience. Do co-operative banks suffer from board deficiencies less than joint stock banks?. To answer this question, we analyse banks operating in Italy during the time span 2006-2012 to verify whether the governing bodies of co-operative banks are less effective in carrying out their duties than those of joint stock banks. Deficiencies of governing body are measured by sanctions imposed by the Supervisory Authority. Research Findings/Insights: Findings revealed that the board of directors (BoDs) of cooperative banks were sanctioned more compared to BoDs of joint stock banks. Furthermore it emerged that board turnover mediate the relationship between cooperative model and board deficiencies. Theoretical/Academic Implications: This study provides empirical evidence in support of theories that emphasize the weakness of corporate governance in co-operative banks. Methodologically, the novelty of our approach is the adoption of a measure of board effectiveness/deficiency based on a third-party independent perspective (regulatory body), which is not biased by the different objective function as well the different incentive structure of the two types of banks. Practitioner/Policy Implications: The findings have several policy and managerial implications. We contribute to the on-going debate on the proposal for flexible regulation on corporate governance for cooperative banks and underline that policy-makers and regulators have to rethink the corporate governance structures of co-operative banks. In addition, the study focuses on specific intervention that can be undertaken at bank level to reduce board deficiencies