Corporate Governance and Social Responsibility in Banking and Insurance

Ma sa r yk Un iv e rsi t y
Faculty of Economics and Administration
Field of study: Finance

CORPORATE GOVERNANCE
AND SOCIAL RESPONSIBILITY
IN BANKING AND INSURANCE
Diploma Thesis

Thesis Supervisor:
Oleg DEEV

Author:
Nino KHAZALIA

Brno, 2016



Nam e and surn am e of t he aut hor:
M ast er’s t hesi s t i t l e:

Ni no Khaz al i a
C orporat e Gov ernan ce and S oci al
R esponsi bi l i t y i n B a nki ng and
Insu ranc e

Depart m ent :

Finance

M ast er’s t hesi s supe rvi sor:

Oleg Deev

M ast er’s t hesi s dat e :

2016

Annotation
This thesis examines the effects corporate governance and social responsibility on financial
performance of banks and insurance companies. For this purpose, we have conducted
econometric analysis of panel data and employed four different measures of financial
performance, namely, Tobin’s Q, Market Capitalization to Book Value, Return on Common
Equity (ROE) and Return on Assets (ROA). The thesis is divided into three chapters. First two
chapters provide introduction to the concepts of corporate governance and corporate social
responsibility and discuss existing literature with respect to their impact in financial institutions.
The last chapter introduces the dataset, methodology used to estimate relations under
consideration and discusses corresponding empirical results. Our findings indicate that
corporate governance and social responsibility factors significantly influence financial
performance in both sectors. Furthermore, we document that market performance and
accounting-based profitability measures are affected by relatively different sets of indicators.
Some of the most prominent factors include: board independence, frequency of board meetings
and United Nations (UN) Global Compact signatory.

Keywords
Corporate governance, corporate social responsibility (CSR), econometric analysis, financial
performance

Declaration
"I hereby declare that I worked out the Diploma Thesis “Corporate Governance and Social
Responsibility in Banking and Insurance”, under the supervision of Oleg Deev, and that I stated
in it all the literary resources and other specialist sources used according to legislation, internal
regulations of Masaryk University and internal management acts of Masaryk University and
the Faculty of Economics and Administration".
Brno, 13.05.2016
Author’s signature


Acknowledgement
I would first like to thank my thesis supervisor Oleg Deev for the tremendous support, patience,
motivation, enthusiasm and helpful recommendations.
I would also like to thank my family and friends for providing me with unconditional support
and continuous encouragement throughout my years of study at Masaryk University.


CONTENTS
Introduction ...............................................................................................................................8
1.

Corporate Governance ....................................................................................................10
1.1.

Definition and importance..........................................................................................10

1.2.

Principles of corporate governance and institutional recommendations....................14

1.3.

Changes in corporate governance in regard to the global financial crisis ..................17

1.4.

Empirical evidence on the effects of corporate governance on bank performance ...19

1.5. Empirical evidence on the effects of corporate governance on insurance companies’
performance...........................................................................................................................23
2.

Corporate Social Responsibility .....................................................................................26
2.1.

Definition and importance..........................................................................................26

2.2.

Empirical evidence on the effects of CSR on financial institutions’ performance ....27

3. Empirical Study of Effects of Corporate Governance and Corporate Social
Responsibility on Financial Institutions’ Performance .......................................................32
3.1.

Data ............................................................................................................................32

3.2.

Methodology ..............................................................................................................41

3.3.

Empirical results.........................................................................................................44

3.3.1.

Banks ..................................................................................................................44

3.3.2.

Insurance companies ...........................................................................................55

Conclusion ...............................................................................................................................63
References ................................................................................................................................65
List of Tables ...........................................................................................................................75
List of Figures..........................................................................................................................76
List of Abbreviations ..............................................................................................................77
List of Appendices ...................................................................................................................78


INTRODUCTION
Sound functioning of financial system is an essential factor for country’s economic
development. Banks and insurance companies are some of the major members of the system,
therefore, their effective and efficient performance can directly or indirectly affect lives of
many. As an example, ramifications of recent financial crisis included reduced private or
government investments in different fields, as well as increased unemployment, which in longrung may decrease level of labor force supply (Appelbaum, 2012).
Excessive risk-taking by banks is deemed to be one of the dominant reasons causing meltdown
of financial markets (Peni & Vähämaa, 2011). This could be controlled via corporate
governance mechanisms, as they are meant to deal with principal-agent issues, such as

misbehavior of management that threatens welfare of shareholders and other stakeholders (Gup,
2007). Importance of corporate governance increases in cases of agency problem and high
transaction costs to create comprehensive contracts as a solution (Hart, 1995). Since both of the
conditions are present in banks and insurance companies, it’s not surprising that particular
researchers connect results of crisis to shortcomings in existing corporate governance practices
and regulation (Cheng, Hong and Scheinkman 2010; Ellul and Yerramilli 2013; Keys et al.
2009).1 Some of the documented examples of weak corporate governance procedures include:
activity, rather than enterprise-based risk management, uninformed boards and senior
management about risk exposures, failure of boards to establish suitable metrics to monitor
implementation of approved strategy and misalignment of remuneration systems with the longterm interests of the company (OECD Steering Group on Corporate Governance, 2009).
New Basel III standards, issued in response to 2008 financial distress may enhance corporate
governance by limiting risky decision-making and providing increased transparency for
investors (Howard, 2014). Based on the thorough analysis of corporate governance procedures
failures during the crisis, Organisation for Economic Co-operation and Development (OECD)
as well as Basel Committee on Banking Supervision (BCBS) have published revisions of
recommended principles, thus, placing special emphases on importance of corporate
governance for stability of financial systems (OECD, 2010; BCBS, 2010).
Apart from the fact that good corporate governance is believed to be helpful in strengthening
firms’ ability to resist unfavorable externalities (Greuning & Brajovic-Bratanovic, 2009), in
literature it is also associated with better financial performance (e.g. Peni and Vähämaa, 2012;
Caprio, Laeven, and Levine, 2007; Cornett, McNutt, and Tehranian, 2009). However, empirical
evidence is not entirely straightforward with respect to every aspect of corporate governance
practices.
Corporate governance is closely related to the concept of corporate social responsibility
(Louche & Van den Berghe, 2005). Despite longevity of discussion in management literature
regarding corporate social responsibility (CSR) and related concepts, such as corporate social
performance (CSP), corporate social responsiveness or corporate citizenship, the domain still
remains “controversial, fluid, ambiguous and difficult to research” (Wood, 2010, p. 50). In light
of recent financial crisis, engagement in socially responsible behavior can be viewed as
compensation from financial institutions for receiving public resources instead of raising capital

from shareholders (Shen, Wu, Chen, & Fang, 2016).
Similarly to corporate governance studies, scholars have been interested in investigating
association between CSR and various aspects of performance (e.g. Soana, 2011; Jo, Kim and
Cited according to Laeven, Luc. 2013. Corporate Governance: What’s Special About Banks? Annual Review
of Financial Economics, 5, 63-92. Available at: />1

8


Park, 2015; Simpson and Kohers, 2002). Although, due to diverse underlying motives of
engagement in CSR, usage of different methods, measures, model specifications, industries or
time periods, evidence regarding the question under consideration has been mixed and
contradictory.
The aim of this thesis is to investigate impact of corporate governance and social responsibility
on financial performance of listed European banks and insurance companies. For this purpose,
we conduct econometric analysis of panel data based on a sample of 98 banks and 40 insurance
companies across Europe. In quantifying financial performance, we follow existing literature
and employ Tobin’s Q and Market Capitalization to Book Value as proxies of market
performance, while Return on Common Equity (ROE) and Return on Assets (ROA) are used
to measure companies’ accounting-based profitability.
Our study extends earlier research on the relationship between corporate governance and CSR
and financial performance by examining practically identical sets of factors in banking and
insurance sectors separately. Furthermore, unlike previous investigations, we study CSR and
corporate governance indicators simultaneously, and finally, we retrieve data from the
Bloomberg, thus involving all the available and relevant measures of Environmental, Social,
and Governance (ESG) factors.
The remainder of this thesis is organized as follows: Chapter 1 provides introduction to the
concept of corporate governance, explores international principles and recommendations in
response to recent financial crisis and provides insight of existing literature in this regard.
Chapter 2 presents review of the literature on corporate social responsibility and its impact on

financial performance. Chapter 3 introduces the data, methodology used to estimate relations
under consideration and discusses corresponding empirical results.

9


1.

CORPORATE GOVERNANCE

1.1.

Definition and importance

Before proceeding to the ultimate goal of the thesis to determine relationship between corporate
governance and financial performance, this section briefly reviews existed definitions and
treatments towards the concept itself. In some cases, issues addressed by corporate governance
have been mainly associated with principal-agent problem (Gup, 2007). A principal-agent
problem arises when there is a need to create optimal contract between two parties, where one
party (agent) is offered a contract to perform certain tasks on the other’s behalf and thus is able
to influence outcomes of the process. The group of investors and their portfolio managers or
the owners of the companies and their managers and chief executive officers (CEOs) are some
examples of who can be treated as principals and agents (Cvitanić & Zhang, 2013). The root of
the problem is information asymmetry, which allows agents to behave in their own interest,
against principles’ expectations (Venuti & Alfiero, 2016).
Even though there are similarities in understanding the idea of corporate governance, exact
definitions vary and depend on the regions, models, authors or the purpose of the research. For
example, while studying history of corporate governance development in different countries
Morck and Steier (2005) address the concept as decisions about capital allocation across and
within firms.

In a broad way “corporate governance can be considered as an environment of trust, ethics,
moral values and confidence – as a synergic effort of all the constituents of society – that is the
stakeholders, including government; the general public etc.; professional/service providers –
and the corporate sector” (Crowther & Aras, 2009, p. 26). At the same time “Corporate
governance involves a set of relationships between a company’s management, its board, its
shareholders and other stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining those objectives and
monitoring performance are determined” (Organisation for Economic Co-operation and
Development, 2004, p. 11). In other cases, concept is described into more details and main
emphasis is put on accountability: “It can include a range of activities, such as setting business
strategies and objectives, determining risk appetite, establishing culture and values, developing
internal policies, and monitoring performance. Corporate fairness, transparency, and
accountability commonly are viewed as goals of corporate governance” (Federal Deposit
Insurance Corporation, 2005, para. 2).
Constituents of corporate governance in banking include managing operations in accordance
with legislation, specified risk profile and interests of stakeholders (Greuning & BrajovicBratanovic, 2009).
Gup (2007) distinguishes two different models of corporate governance in banks: The AngloAmerican and Franco-German. In Anglo-American model, main concern of corporate
governance is “how to assure financiers that they get a return on their financial investment” and
thus “deals with the agency problem: the separation of management and finance” (Shleifer &
Vishny, 1997, p. 773); whereas Franco-German model is characterized with relatively high
concentration of ownership and takes into account the interests of not only shareholders but
also stakeholders (Gup, 2007). Besides, unless presence of specific legal requirements, in
Anglo-American model, management is expected to make decision in favor of shareholders
whenever shareholder value maximization interests conflicts with any other interested parties
(Macey & O’Hara, 2003). A relatively simple and organized comparison of these two prevailing
models are presented by Baran (2008) which we provide in Table 1.
10


Since our sample of the companies mostly consist of the firms from continental Europe, FrancoGerman model of corporate governance is of particular interest. As evident in Table 1, main

features of continental system are two-level board structure, consisting of executive and
supervisory board, concentration of ownership with strong representation of banks and counting
on bank credits rather than financial markets for raising additional capital.
Implications of good corporate governance are studied in different aspects, although, generally
it is believed to help companies avoid adverse situations, create economic value and ultimately
“underpin investor confidence in a market and trust in individual company management”
(Edkins, 2012, p. 14)
Table 1 – Comparison of corporate governance systems
Attribute
Anglo-Saxon system

Continental system

model of administrative authorities

one-level

two-level

executive body

executive directors

board of directors

controlling body

non-executive directors supervisory council

representation of banks

inadmissible

strong

representation of employees

undesirable

obligatory

representation of the political sphere

undesirable

indirect

control of managers

indirect

direct monitoring

ownership of stocks

scattered

concentrated

ownership of stocks by banks

minimum

big shares

ownership of stocks by the management

unremarkable

rare

involvement of banks

passive

active and decisive

links of the bank and industrial capital

inadmissible

very narrow

acquisition of capital

emission of stocks

bank credits

credits from banks

short-term

long-term

capital markets

high-liquid

low-liquid

number of listed firms

great

small

control by the capital market

high

low

control by banks

inadmissible

high

Source: Baran, 2008, p. 419

Effective and sound functioning of banking system is vital for economic development of a
country. Importance of the banks’ robust performance increases in those countries where main
sources of obtaining funds to finance companies’ activities are financial intermediaries rather
than financial markets; or if banks can play significant role not only through direct possession
of stocks, but via subsidiary investment funds or management of depositary proxy rights. For
instance, in 1992 in Germany voting rights exercised by banks in general shareholder meetings
of 24 largest widely held stock corporations on average amounted to 84.09% (Aluchna, 2009).
According to Hart (1995), importance of corporate governance increases in cases of agency
problem and high transaction costs of creating comprehensive contracts in order to solve the
abovementioned problem. Author discusses several mechanisms which can constrain
managers’ activities driven by own interest, such as monitor held by boards of directors or large
11


shareholders, as well as threat of proxy fights, hostile takeovers and relinquished positions in
case of inability to pay debts that company faces.
More generally, de Haan & Vlahu (2015) outline following mechanisms that might be utilized
by investors to reduce agency problems:
1. The size and composition of the board ─ boards of directors are appointed by
shareholders. By means of advising and monitoring management they are expected to
protect shareholders’ interests. Boards in banks are reported to be bigger than in firms
from other spheres that could be explained by relatively larger volume of assets
managed or complexity of organizational structure. As for composition, inclusion of
independent directors is justified by their potential of being more effective in
controlling the management.2
2. Concentrated ownership ─ the reason why concentrated ownership could be used for
controlling management is existence of free riding problem in companies with scattered
shareholders. Whereas large shareholders are expected to have better informational
background which they should use in favor of all the shareholders. However, empirical

evidence regarding the subject is diversified. As for distribution of bank ownership
across the world, according to Caprio et al. (2007), in three forth of the cases banks are
not widely held, although results are different on country level.
3. Management compensation schemes ─ compensation schemes are used to incentivize
managers to maximize shareholder value. However, it’s necessary to align
management’s interest to company’s long-term performance, otherwise the scheme can
promote excessive risk-taking if payment depends largely on company’s short-term
performance.
4. The market for corporate control ─ proxy contests, friendly mergers and takeovers, and
hostile takeovers are ways of market corporate control, the latter perceived as the most
effective in ensuring that management’s behavior is in line with shareholders’ interests.
Empirical evidence on its effectiveness though varies according to a time frame and
differs depending on year of study publication. In particular, M&A (Mergers and
Acquisitions) performance studies published before and after 2000 have different
consensus about the issue (DeYoung, Evanoff, & Molyneux, 2009).
Corporate governance practices applied in particular bank can be deemed as one of the main
factors influencing bank’s sound performance. Even though banks might be perceived as
ordinary firms, Levine (2004) marks out two specific characteristics of them which motivates
independent analysis of governance in banks: relative opacity in comparison with other
nonfinancial companies and often heavy regulation of the sector by governments. He states that
these characteristics have particular implications against common corporate governance
mechanisms. First of all, higher degree of information asymmetry lowers the possibility of
interested parties like debt/equity holders to control bank managers’ activities. Furthermore, it
complicates formulation of contracts that would ensure conformity of managers’ behavior with
shareholders’ interests and finally decreases effectiveness of hostile takeovers and competitive
product markets as corporate governance mechanisms. As for another characteristic, based on
the research of 107 countries, Barth, Caprio, Levine (2004) find that majority of them

2

As opposed to agency theory, the stewardship theory suggests that due to better understanding of the business
and absence of agency costs, significant participation of inside directors on the board should lead to more
effective and efficient decision-making process (Tannaa, Pasiouras, & Nnadi, 2011).
12


(approximately 73%) restrain concentration of bank ownership into single entity.3 Besides,
Levine (2004) marks out that governments often impede competition in banking sector through
regulating range of activities allowed to banks to engage, imposing portfolio restrictions,
liquidity requirements or even limits on interest rates. This type of regulation hinders usage of
common corporate governance mechanisms, such as equity concentration and competition.
In addition to the abovementioned characteristics, Laeven (2013) emphasizes following aspects
that differentiate banks from other nonfinancial companies: presence of high leverage, diffuse
debtholders (depositors), relatively long-term assets in comparison to liabilities and their
representation as large creditors. High leverage has special implication in combination with
opacity of assets. These factors create possibilities as well as incentives to take excessive risk
and thus increase “financial fragility”. However, the main determinant of banks’ distinctness is
deposit insurance and regulation since they influence utilization of the traditional corporate
governance mechanisms. While deposit insurance demotivates depositors to monitor banks’
performance, restrictive regulations may weaken “effectiveness of the market for corporate
control” (p. 68).
Listed differences of corporate governance in banking leads to separate and independent
analysis of application of corporate governance mechanisms. Besides, in order to provide sound
financial system and protect it from excessive risk-taking from banks, Laeven (2013) argues
that it’s not enough to focus just on individual bank’s compliance with corporate governance
standards and it’s necessary to improve corporate governance and regulation simultaneously,
in combination and coherently.
Insurance companies also have industry specific characteristics, some of which even
distinguishes them from other financial institutions. Venuti and Alfiero (2016) outline the
following industry specific traits that influence application of corporate governance

mechanisms in insurance companies:





Strict regulation of the sector regarding solvency as well as pricing, provided by
different regulators leading to relative heterogeneity in legislation.
Inversion of production cycle as long as raising revenue in the form of premiums
precede the time when corresponding costs are incurred.
Another peculiarity regarding revenues/costs generation is related to certainty of the
former in terms of amount and time and uncertainty of the latter until policy expires.
High level of “social relevance” and importance for the community, policyholders and
financial markets due to their role as institutional investors.

All the mentioned characteristics underscore the importance of risk management in insurance
companies and therefore need to apply correct corporate governance practices in order to
address existent and potential risks. Furthermore, purposes of good corporate governance
practices are not limited to protection against different types of risks and include supporting
company success by making it more attractive to investors and highly qualified professionals
(Njegomir & Tepavac, 2014).
While describing general approaches and ways of thinking towards corporate governance in
banking and insurance, we would like to emphasize that the aim of this thesis is to measure

3

Cited according to Levine, Ross. 2004. The Corporate Governance of Banks - a concise discussion of concepts
and evidence. Policy, Research working paper; no. WPS 3404. Washington, DC: World Bank. Available at:
/>13

relationship between corporate governance and social responsibility practices and different
aspects of performance with reference to European banking and insurance industries.

1.2.

Principles of corporate governance and institutional
recommendations

Tannaa, Pasiouras and Nnadi (2011) describe different types of principles and regulations under
which banks operate, in particular, codes of conduct aiming to foster efficient functioning and
fairness of financial market; macro-prudential regulations addressing systemic risk; microprudential regulations controlling risks on the individual company-basis and finally, principles
and policy recommendations that directly affect their corporate governance. In this section, we
will focus only on those, having direct impact on the way in which banks are governed.
First of all, we should discuss OECD Principles of Corporate Governance formulated in order
to assist governments, corporations, investors and other participants in developing good
corporate governance. The document published in 2004 represents a baseline and provides
general understanding of corporate governance framework. While acknowledging the fact that
single universal model of good corporate governance doesn’t exist, based on common features
of different models OECD (2004) presents 6 broad principles, which are further explained and
supplemented by annotations, particular examples and methods of implementation. Below we
provide abovementioned principles and short comments about their rationale:
I.

Ensuring the Basis for an Effective Corporate Governance Framework – “The
corporate governance framework should promote transparent and efficient markets,
be consistent with the rule of law and clearly articulate the division of
responsibilities among different supervisory, regulatory and enforcement
authorities” (p. 29) – while developed by taking into account overall impact of the
framework on economic performance, system should be reliable for all market

participants, at the same time remaining open for changes and adjustments in
accordance with new business experiences.

II.

The Rights of Shareholders and Key Ownership Functions – “The corporate
governance framework should protect and facilitate the exercise of shareholders’
rights” (p. 32) – section discloses most basic rights of shareholders, such as voting
and participation in general shareholder meetings, election and removal of board
members and so on. Those rights, according to the report are recognized by basically
all OECD countries.

III.

The Equitable Treatment of Shareholders – “The corporate governance framework
should ensure the equitable treatment of all shareholders, including minority and
foreign shareholders. All shareholders should have the opportunity to obtain
effective redress for violation of their rights” (p. 40) – The goal of the principle is
to protect investors for instance, by utilizing ex-ante and ex-post shareholder rights.
More specific example might be the ability “to initiate legal and administrative
proceedings against management and board members”, although the risk of
litigation abuse rises the need of striking a balance between the two.

IV.

The Role of Stakeholders in Corporate Governance – “The corporate governance
framework should recognise the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation between corporations and
stakeholders in creating wealth, jobs, and the sustainability of financially sound
enterprises” (p. 46) – since the stakeholders of the company, such as for example

14


investors, employees, creditors, and suppliers are also considerable resource
providers to overall success of the firm, the governance framework is encouraged to
recognize the benefits of serving stakeholders’ interests.
V.

Disclosure and Transparency – “The corporate governance framework should
ensure that timely and accurate disclosure is made on all material matters regarding
the corporation, including the financial situation, performance, ownership, and
governance of the company” (p. 49) – Promotion of transparency is a core quality
of the corporate governance framework because of many reasons. Firstly, it ensures
availability of market-based monitoring and shareholders’ right to be informed
before making decisions. Besides, lack of accurate and valuable information may
lead to increase in cost of capital, inefficient allocation of resources and ultimately,
improper functioning of markets.

VI.

The Responsibilities of the Board – “The corporate governance framework should
ensure the strategic guidance of the company, the effective monitoring of
management by the board, and the board’s accountability to the company and the
shareholders” (p. 58) – Boards are also expected to act in the best interests of
shareholders, ensure adequate return for them, deal with stakeholders and exercise
objective and independent judgement while fulfilling their duties.

Given the importance of banking industry, in 1999 the Basel Committee on Banking
Supervision (BCBS) published guidance with an intention to “assist banking supervisors in
promoting the adoption of sound corporate governance practices by banking organisations in

their countries” (Bank for International Settlements, 2006, para. 1). Furthermore, BCBS issued
revised version of the document in 2006. Due to corporate governance failures witnessed during
the financial crisis, the Basel Committee published Principles for enhancing corporate
governance (2010) where best practices for banking organisations are documented and strongly
recommended. The final version of aforementioned document, dated by July 2015 establishes
13 principles based on more general background provided by OECD (2004). The
aforementioned principles address issues related to board and risk into more details, namely
through three principles for each. Since board’s responsibilities, composition and structure is
also discussed in OECD principles above, here we focus on risk management, monitoring and
controlling. Distinguishing quality of the Basel Committee principles is to prescribe risk
management functions and responsibilities of chief risk officer (CRO) or equivalent (Basel
Committee on Banking Supervision, 2015). For the effective execution of his/her function, it’s
important for CRO to have sufficient authority, expertise and access to the board. Besides,
duties related to position should not be connected to the executive functions in order to avoid
conflict of interest. To facilitate risk identification and subsequent actions, BCBS issued
Principles for effective risk data aggregation and risk reporting in January 2013, required for
global systemically important banks (G-SIBs) to be implemented by 2016. Important tools for
addressing and mitigating risk are stress tests and scenario analyses, which are additionally
discussed in Principles for sound stress testing practices and supervision (2009). Finally, strong
risk culture, that implies ongoing robust communication about risk issues horizontally as well
as vertically, is a key quality of an effective risk governance framework. Other areas, covered
by BCBS include senior management, internal audit, compensation, governance of group
structures, management of compliance risk, disclosure and transparency and the role of
supervisors.
Next we discuss general approaches, regulatory framework and monitoring in large European
countries, such as the UK, France, Germany, Netherlands, Italy and Spain. Review is based on
15


the Corporate Governance Guide for Main Market and AIM Companies (2012) published on

London Stock Exchange web site.4 As described below, mentioned states provide their own
governance frameworks, while all applying the ‘comply or explain’ principle, which implies
that companies should either adopt the suggestions contained by relevant code (and report about
it), or explain the reasons of non-compliance. The exception is Italy, which introduces the
regime only in case of adoption of the Italian Corporate Governance Code. The
abovementioned approach gives the boards opportunities to make judgements on a case-bycase basis and therefore achieve good corporate governance by means that take into account
individual company characteristics, such as for example culture, size, complexity and nature of
imposed risks (Murphy & Cronin, 2012).
The UK Corporate Governance Code (formerly the Combined Code) is a set of standards of
good practice regarding board leadership and effectiveness, remuneration, accountability and
relations with shareholders (Financial Reporting Council, 2014). All companies with a
Premium Listing of equity shares in the UK are required to report on how they have applied the
main principles of the Code in their annual report and accounts. For each determined area the
Code provides Main Principles, Supporting Principles and Code provisions. A Leadership
section underscores the chairman’s responsibility as a leader of the board, which is on its own
part, responsible for long-term success of the company. Necessity of the board and its
committees to be balanced taking into account skills, experience, independence and knowledge
of the company is prescribed in section Effectiveness. Section Accountability makes boards
responsible for “determining the nature and extent of the principal risks it is willing to take” (p.
5) as well as maintaining sound risk management and internal control systems and appropriate
relationship with auditors. Section Remuneration requires existence of transparent procedures,
no director involvement in decision-making about remuneration of one’s own self, encourages
companies to pay not more than necessary and to link significant part of the remuneration with
performance (Murphy & Cronin, 2012). Finally, section Relations with shareholders places
responsibility on boards to ensure satisfactory dialogue with shareholders and promoting their
participation (Financial Reporting Council, 2014).
Following discussion regarding corporate governance systems in other countries are based on
review of Knapp (2012).
The French Commercial Code obliges all the companies with registered offices in France and
with financial securities admitted to trading on a regulated market to adhere to the corporate

governance code, published by the French Association of Private Sector Companies and the
French Business Confederation, or the Middlenext code in case of small and mid-sized
companies. Although French markets regulator (AMF) is not empowered to apply any
disciplinary actions for non-compliance with the corporate governance codes, publication of
detailed annual report on general application of corporate governance rules forces companies
included in French stock market indices such as CAC40 and SBF120 to strictly adhere to
recommendations.
According to the German Stock Corporation Act recommendations and suggestions provided
by German Corporate Governance Code are required to be applied by listed corporations,
partnerships limited by shares, European companies incorporated in Germany, also non-listed
German incorporated companies if they have issued financial instruments other than shares for
trading on a regulated market within the European Economic Area, or have their shares traded
AIM (Alternative Investment Market) is the “London Stock Exchange’s international market for smaller,
growing companies. Businesses on AIM operate under a more flexible regulatory environment than the Main
Market of the Exchange” (London Stock Exchange Group, n.d., p. 238).
4

16


on a multilateral trading facility (MTF). However, no specific body has the power to formally
monitor and review companies’ compliance, therefore, ultimate responsibility lays on
shareholders.
All listed companies with their statutory seat in the Netherlands and shares or depositary
receipts for shares admitted to an MTF in the European Union (EU) or any similar system
outside the EU are obliged by the Dutch Civil Code to adhere to the Dutch Corporate
Governance Code. Compliance is monitored by the Dutch Corporate Governance Code
Monitoring Committee, while disclosure of compliance statement is verified by Dutch
Financial Markets Authority.
All issuers of securities that are admitted to trading on a regulated market in Italy are required

to disclose key elements of their governance structure and practices pursuant to the Italian
Consolidated Financial Act. In case of voluntary adoption of the Italian Corporate Governance
Code, companies should make reference to particular recommendations that were implemented.
Mid-sized companies admitted to the STAR segment of the MTA market5 organized and
managed by Borsa Italiana (the Italian Stock Exchange), have obligation to comply with only
part of the recommendations. Adherence and implementation is checked at different levels, in
particular, the board of statutory auditors of each issuer is responsible for overseeing proper
adoption of the code; the Italian Securities and Exchange Commission (Consob) controls
disclosure of compulsory information, as well as compliance in case of the code adoption; and
finally, Italian Association of Joint Stock Companies (Assonime) analyses degree of Corporate
Governance Code implementation in listed companies annually.
Pursuant to the Spanish Securities Market Act, all companies domiciled and listed in Spain must
adhere to the Spanish Corporate Governance Code and publish annual report containing
comprehensive information about their governance structure and practices. The Spanish Stock
Exchange Commission is in charge of monitoring overall compliance with the code.
Evidently, corporate governance frameworks as well as monitoring of their application are far
from uniformity even in discussed six countries. However, increased calls for more harmonized
approach within members of European Union might gradually lead to convergence of applied
corporate governance practices.

1.3.

Changes in corporate governance in regard to the global financial
crisis

Financial crisis of 2008 indicated existing shortcomings in corporate governance and motivated
further investigations of them. As a result, in 2009-2010 the OECD Steering Group on
Corporate Governance presented analysis of weaknesses in corporate governance, their
contribution in development of crisis and finally, conclusions and recommendations with regard
to discussed issues in three documents: The Corporate Governance Lessons from the Financial

Crisis (2009), Corporate Governance and the Financial Crisis: Key Findings and Main
Messages (2009), Corporate Governance and the Financial Crisis: Conclusions and emerging
good practices to enhance implementation of the Principles (2010).

5

MTA (Mercato Telematico Azionario) is the Italian Equity Market dedicated to mid and large size companies
that meet the best international standards; as for STAR, it is the segment of MTA dedicated to midsize
companies who are leaders in their industry (London Stock Exchange Group, n.d.), accessed at
/>17


First of all, The Corporate Governance Lessons from the Financial Crisis (2009) concludes
that weak corporate governance procedures can be treated as causes of financial crisis to a
significant extent. Some of the examples of corporate governance failures include: inefficiency
of remuneration system in aligning management’s interest to those of shareholders; lack of
communication between senior management, risk management staff and board partly
attributable to a silo approach6 to risk management as reported by UBS7 and lack of thorough
understanding of risk measurement methodologies applied in banks by strategy and planning
functions as stressed by two thirds of large European banks in interviews held by Ladipo et al.
(2008, p. 45). However, main source of financial crisis was not the inefficiency of existing
principles, but rather, insufficient and patchy implementation of them. Consequently, based on
the key findings of abovementioned research, the OECD Steering Group on Corporate
Governance suggests following supplements regarding five key areas:
1. Ensuring the basics for an effective corporate governance framework
According to report, attention should be paid to proper implementation of existing
standards in order to avoid “box ticking” i.e. only formal compliance to Corporate
Governance Codes. In addition, authorities are encouraged to regularly review the
relevance of current corporate governance rules in accordance with market
developments.

2. Governance of remuneration and incentives
Since overly complicated remuneration schemes with limited downside risk hinders
boards to effectively oversee executive remuneration, the plans are advised to be
simplified and focused on creating linkage between compensation and long-term
interests of the company at the same time achieving “symmetry between the upside and
downside performance-based compensation” (p. 9). Good practices outlined include
increasing the role of non-executives in the process and submission of remuneration
policies and implementation measures to the annual meeting.
3. Improving the governance of risk management
As also discussed in Corporate governance principles for banks, good practice is to
separate risk-management and control functions from profit centers, thus, appointing
executive officer with considerable independence from CEO and direct accountability
to board of directors (Basel Committee on Banking Supervision, 2015). Another issue
has been related to readability of risk disclosures, therefore, risk assessments results
have been suggested to be presented in a transparent and understandable fashion.
4. Improving board practices
Dominance of boards by CEO has been reported to be one of the impediment for
objective judgement exercised by boards. Subsequent suggestion underscores
importance of Chair of the board to play a key role and in case of CEO duality, necessity
to disclose measures taken in order to avoid conflicts of interest. Other advices discussed
are promoting competent boards by for example providing access to training programs
and carrying out board evaluations; improving board independence and objectivity via
determining term limits on board membership; dealing with complexity through “setting

A “Silo-based” approach refers to traditional risk management approach, where different categories of the risk
are managed separately, for example in financial institutions market, credit, liquidity, and operational risks might
be addressed separately in individual risk silos (Liebenberg & Hoyt, 2003).
7
Cited according to The Corporate Governance Lessons from the Financial Crisis, OECD, February 2009, p. 11
available at />18

6


clear lines of responsibility and accountability throughout the organisation, including
subsidiaries, key partnerships and other contractual relations” (p. 22).
5. The exercise of shareholder rights
Good practices in this area include disclosure of voting records by institutional investors
to their clients, for whom they act in a fiduciary capacity; making references to codes
of principles and their implementation. In the end, due to increased influence of proxy
advisors, authorities are encouraged to ensure competitive market for these services and
“monitor the management of conflicts of interest by advisors” (p. 30)
In the aftermath of financial crisis, the UK government also commissioned analysis and
subsequent recommendations that are presented in the Walker (2009) report (Tannaa, Pasiouras,
& Nnadi, 2011). In total 39 recommendations are divided into 5 parts and relate to: Board size,
composition and qualification, Functioning of the board and evaluation of performance, The
role of institutional shareholders: communication and engagement, Governance of risk, and
Remuneration. Noticeably, issues covered are similar to those, already discussed above. In
addition, significant emphasis is put on time commitment of board chairman, as well as nonexecutive directors, who are also required to have sufficient knowledge and understanding of
the business (Walker, 2009).
Overall, both set of principles (BCBS, OECD) and supplements taking into account roots of
reasons of financial crisis are aimed to minimize possibility of its reoccurrence. Their
effectiveness will depend on their complete and successful implementation by all the
participants of corporate governance process and will be tested through time.

1.4.

Empirical evidence on the effects of corporate governance on bank
performance

As already discussed above, literature doesn’t provide exhaustive definition for corporate

governance that would lead to uniformity in empirical studies. As a result, for the purposes of
understanding relations between corporate governance and financial performance in banks,
researchers address different aspects or employ designed indices, which covers several facets
simultaneously. Two relatively widely used corporate governance mechanisms are board size
and independence. Below we provide review of empirical evidence with respect to each of them
separately. Afterwards, we discuss existed literature about other less investigated aspects, such
as for example CEO pay-performance sensitivity or frequency of board meeting.
Board size is one of the components of internal corporate governance. Although, evidence
regarding its effectiveness is not straightforward. Table 2 summarizes results of empirical
studies in this regard.
Evidently, most of the studies that examine impacts of board size in banks find positive
association between number of board members and different measures of financial
performance, while two of them report existence of inverted U-shaped relationship, meaning
that after certain point, increased board size doesn’t contribute to shareholder value creation.
Benefits of large boards can be attributed to increased pool of experience and resources that
enhances advisory and monitoring roles of boards, however when interpreting results, we
should take into account possibility of reverse causality, which is not properly addressed in
most of the studies presented here (de Haan & Vlahu, 2015).

19


In order to explore influence of board size on banks market or accounting-based performance,
we discuss some of the researches disclosed in Table 2 into more details. Agoraki, Delis and
Staikouras (2010) and Tannaa, Pasiouras and Nnadi (2011) both investgate impact of board
structure on bank efficiency in Europe and specifically in the UK respectively. While former
finds negative relationship between board size and cost and profit efficiency, the latter reports
positive influense, although not robust through all the specifications. Negative association of
board size with financial and operational performance of European banking system, measured
with ROE, ROA and Tobin’s Q is also reported by Staikouras et al. (2007). At the same time,

Adams and Mehran (2012) provide evidence in favor of large boards in U.S. Bank Holding
Companies (BHCs).
Table 2 ─ Recent studies on board size and bank performance
Study

Countries

Sample

Time Span

Result

de Andres and Vallelado (2008)

Canada, France,
Italy, Spain, the
UK, U.S.

69 large banks

1995–2005

Inverted U-shaped
relationship

Grove et al. (2011)

U.S.

236 banks

2005–2008

Inverted U-shaped
relationship

Adams (2012)

U.S.

89 banks

2008–2009

Positive

Adams and Mehran (2012)

U.S.

35 bank holding
companies (BHCs)

1964–1985

Positive

Aebi et al. (2012)

U.S.

372 banks

2007–2008

Positive

International
sample

164 large banks

2007–2008

Positive

Tannaa et al. (2011)

UK

17 banking
institutions

2001-2006

Positive

Faleye and Krishnan (2010)

U.S.

51 banks

1994–2006

Negative

Wang et al. (2012)

U.S.

68 BHCs

2007

Negative

Staikouras et al. (2007)

Europe

58 large banks

2002–2004

Negative

Agoraki et al. (2010)

Europe

57 large banks

2002-2006

Negative

Beltratti and Stulz (2012)

Source: Author’s own compilation

Taking into account the idiosyncratic nature of banking industry and its influence on application
of corporate governance mechanisms, de Andres and Vallelado (2008) emphasize importance
of boards of directors, in particular their monitoring and advising function. In their study of 69
large commercial banks from Canada, France, Italy, Spain, the UK, and the U.S. for the period
of 1995-2005, authors demonstrate existence of “an inverted U-shaped relation” between board
size, fraction of non-executive directors and bank performance; meaning that, both independent
variables are characterized by diminishing marginal returns and therefore, optimum number of
board members should be determined as well as level of board independence in order to create
shareholder value.
Another important dimension of board structure is independence. Implications of different
levels of independence is not straightforward even theoretically. For example, more
independent boards are expected to monitor management properly since their compensation is
not linked to short-term objectives and they are concerned about their reputation (de Haan &
Vlahu, 2015). However, increased independence in unitary board system might lead to lack of
information, provided by managers and thus cause adverse consequences, such as reduction of
boards monitoring function (Adams & Ferreira, 2007). Table 3 presents short summery of
conducted empirical researches regarding board independence. Interestingly, evidence is as
20

diverse as theoretical background, in fact, most of these studies do not find any significant
correlation between the two.
Just as in case of board size, we review some of the works disclosed in Table 3 more precisely.
Study of banking institutions operating in the UK underscore importance of board
independence by revealing robustly significantly positive association between non-executive
directors and all measures of efficiency (Tannaa, Pasiouras, & Nnadi, 2011). In large European
banks connection is not that straightforward and instead is characterized with non-linearity,
meaning that after specific point, effect of increasing the number of non-executive directors on
profit efficiency turns out to be negative (Agoraki, Delis, & Staikouras, 2010). As for market
and accounting-based financial performance in European banking system, board composition
doesn’t play crucial role in terms of statistical significance (Staikouras, Staikouras, & Agoraki,
2007).
Table 3 ─ Recent studies on board independence and bank performance
Study

Countries

Sample

Time Span

Result

de Andres and Vallelado (2008)

Canada, France,
Italy, Spain, the
UK, U.S.

69 large banks

1995–2005

Inverted U-shaped
relationship

Agoraki et al. (2010)

Europe

57 large banks

2002-2006

Non-linear

Pi and Timme (1993)

U.S.

112 banks

1987–1990

Not significant

Adams and Mehran (2012)

U.S.

35 BHCs

1964–1985

Not significant

Adams and Mehran (2008)

U.S.

35 BHCs

1986-1996

Not significant

Berger et al. (2012)

U.S.

328 commercial
banks

2007–2010

Not significant

Fernandes and Fich (2009)

U.S.

398 banks

2007–2008

Not significant

Aebi et al. (2012)

U.S.

372 banks

2007–2008

Negative but mostly
insignificant

International
sample

164 large banks

2007–2009

Negative

Wang et al. (2012)

U.S.

68 BHCs

2007

Negative

Cornett et al. (2010)

U.S.

All publicly traded
BHCs

2003–2008

Positive

Cornett et al. (2009)

U.S.

100 largest BHCs

1994–2002

Positive

Mishra and Nielsen (2000)

U.S.

89 largest BHCs

1975–1989

Positive

Tannaa et al. (2011)

UK

17 banking
institutions

2001-2006

Positive

Europe

58 large banks

2002–2004

Positive but mostly
insignificant

Beltratti and Stulz (2012)

Staikouras et al. (2007)

Source: Author’s own compilation

While studying large, publicly traded U.S. bank holding companies, Adams and Mehran (2008)
find that proportion of independent board members is not significantly related to performance,
measured by Tobin’s Q; However, Cornett et al. (2009) argue that strong board of directors is
significantly positively related to bank performance, as proxied by earnings before
extraordinary items and after taxes to total year-end assets. Furthermore, authors claim that
corporate governance mechanisms, such as CEO pay-for-performance sensitivity, board
independence, the Tier 1 capital ratio, are simultaneously determined along with performance
and earnings management. As a result of addressing endogeneity by applying two-stage least
21


squares regressions, they reveal negative relationship between performance, board
independence, and capital and earnings management; meaning that, if a bank performs well,
has a strong independent board of directors and sufficient level of capital, management is less
likely to engage in artificial inflation of earnings by usage of loan loss provisions and securities
gains and losses.
Similarly, effects of board independence and pay-performance sensitivity on bank holding
companies’ performance is examined by Mishra and Nielsen (2000). Authors document a
positive influence of relative tenure of independent outside directors and CEO pay-performance
sensitivity on accounting performance, but negative impact of their cross product, which
indicates substitution relation between them; although, it’s worth mentioning that when twostage least squares method is applied, pay-related incentives and the percentage of independent
outside directors show complementary relation. Mentioned empirical results suggest that once
CEO compensation programs are set in accordance with shareholders’ interests, added value of
increase of independent directors’ proportion decreases.

Several studies specifically concentrate on examining linkages between corporate governance
and banks’ performance during or in immediate aftermath of the recent financial crisis of 2008.
Particularly, based on research of 62 large publicly traded U.S. banks Peni and Vähämaa (2011)
find that strong corporate governance, quantified with the index of Brown and Caylor (2006,
2009), was associated with higher profitability, although decreased stock market valuations of
banks amid crisis. However, further observation of subsamples and subperiods reveals
significant and positive impact of corporate governance on stock returns, indicating that later
on strong corporate governance structures helped banks to reduce negative effects of financial
crisis.
As for European banks’ performance amidst market turmoil, study of 97 largest banks
demonstrates different effects of various aspects of corporate governance (Felício, Rodrigues,
Ivashkovskaya, & Stepanova, 2014). In particular, frequency of board and committee meetings
(audit committee, compensation committee) appear to have positive significant influence on
performance, as measured by ROA. One of the reasons behind might be improved
communication between executive and monitoring function. Higher age of directors is also
reported to have positive influence on operating performance as well as on market valuation
that could be attributed to a greater professional experience accumulated by directors. It is
worth mentioning that authors do not find statistically significant effect of CEO duality,
busyness of directors, blockholdings, anti-takeover measures, relative power of insiders and
other corporate governance mechanisms on any measures of performance (ROA, Book to
Market Ratio, Net Interest Margin). On the other hand, size of banks and location of
headquarters in more developed countries, as proxied by GDP per capita are associated with
lower profitability and accordingly, lower operational performance.
The last particular aspect of corporate governance that we cover in our review is organization
of board of directors as one-tier (OTS) or two-tier (TTS) structure.8 De Simone (2012) studies
its impact on bank performance and risk exposure in Euro-area and UK. Results suggest that
risk exposure as measured by distance to default is higher and statistically significant during
the financial crisis in banks which have adopted OTS; on the other hand, the abovementioned
banks outperform the rest according to operational performance, that might be attributed to
lower costs related to one-tier board structure; however, same result doesn’t apply to financial

performance as proxied by abnormal returns. Even though, overall evidence doesn’t support
distinct superiority of either corporate governance pattern, it still indicates necessity to increase
8

Unlike Anglo-American one-tier board model, most European countries have two-tier system, consisting of a
supervisory board and a management (executive) board (de Haan & Vlahu, 2015).
22


monitoring function in OTS and to decrease operating costs and amount of impaired loans in
TTS.
Evidently, existing literature doesn’t provide conclusive results regarding either features of
corporate governance in banks. There are several potential reasons why analyzed empirical
results are in general so divergent, namely, differences in research time-frame (inclusion of
crisis period), interdependence of corporate governance mechanisms and variation in regulation
and governance systems across countries (de Haan & Vlahu, 2015).

1.5.

Empirical evidence on the effects of corporate governance on
insurance companies’ performance

Corporate governance studies in insurance companies are somewhat similar to those in banking
industry in terms of observed aspects, however, there still exist some differences. Table 4
summarizes reviewed literature regarding insurers, although since empirical evidence is
relatively scarce than in case of banks, we present different investigated features together. As
evident in Table 4, most of the studies concentrate on risk-taking behavior in insurance industry,
rather than profitability or market performance. Another peculiarity of studies in this regard is
variation in organizational structures of insurance companies, which allows scholars to explore
its implications in reality. Below we discuss each of these works separately.

Based on research of life insurers in the UK, Hardwick et al. (2011) suggests that corporate
governance is a complex system and possible interactions among different aspects should be
taken into account while forming opinion about their effectiveness. One of the underlying
results leading to such conclusion is that CEO duality per se doesn’t show any significant
influence on profit efficiency, however, in case of separation of the CEO and board chairman
positions and absence of audit committee, impact of board independence measured by
representation of non-executive directors on the board, becomes statistically significantly
positive.
Two other studies that examine factors other than risk-taking are He and Sommer (2011) and
He, Sommer, and Xie (2011). Both researches are based on the same sample, namely 423
mutual and 1,516 stock insurance companies in the property–liability insurance industry within
time period of 1996–2004. While the former investigates how organizational structure affects
CEO turnover, the latter concentrates on post turnover developments, in particular the issue
under consideration is whether companies’ financial performance improves. The results suggest
that likelihood of CEO turnover based on poor performance is significantly higher in stock
firms than in mutual firms while CEO turnover for its part, positively affects insurers’ postturnover performance as measured by cost efficiency and revenue efficiency scores.
The interest in case of the other studies lies in how various mechanisms of corporate governance
influence specific types of risks or risk-taking behavior in general. Ho, Lai and Lee (2013) find
that compared to stock insurers, mutual insurers tend to have lower total risk, including
underwriting and investment risks. As for board composition, CEO duality is found to be
associated with increased level of leverage risk; larger representation of insiders on boards lead
to higher total risk, while large board size is related to both, higher leverage and total risks
(although lower investment risk), naturally pointing to importance of addressing different types
of risks separately.
On the contrary, Venuti and Alfiero (2016) show that in European insurance industry publiclyheld insurance companies are associated with lower risk in comparison with those, held
privately. In addition, they report that larger board size, as well as higher ownership
concentration is significantly correlated with lower risk since the higher the number of directors
on the board, the harder for them to unanimously agree on engaging in risky projects.
23

Other aspect of corporate governance that deserves attention is institutional ownership. Study
held by Cheng, Elyasiani, and Jia (2011) explores its effects on life–health insurers’ risk-taking
behavior. According to the results, stable institutional ownership leads to decreased level of
overall risk, although when investigated in details, authors find that institutional ownership
stability increases investment risk, while decreasing underwriting risk and leverage.
Table 4 ─ Recent studies on corporate governance in insurance companies
Study

Sample

Time
Span

Independent
Variable

Dependent
Variable

Result

Hardwick et
al. (2011)

U.K. Life
insurance
firms

1994–2004

Number of directors
and its square

Profit efficiency

Not significant

He and
Sommer
(2011)

He, Sommer,
and Xie
(2011)

Ho, Lai and
Lee (2013)

1939 U.S.
property–
liability
insurance
companies
1939 U.S.
property–
liability
insurance
companies
252 U.S.

property
casualty
insurance
companies

Proportion of
nonexecutive
directors on the board

Profit efficiency

Organizational
structure

Chief Executive
Officer (CEO)
turnover

1996–2004

CEO turnover

Post-turnover cost
efficiency and
revenue efficiency
scores

Positive

1996–2007

Organizational
structure

Risk-taking

Mutual insurers tend to
have lower total risk.

CEO duality

Leverage risk

Positive

Insiders on boards

Total risk
Leverage and total
risks
Investment risk

Positive

1996–2004

Board size
Board size
Venuti and
Alfiero

(2016)
Cheng,
Elyasiani,
and Jia
(2011)
Downs and
Sommer
(1999)
Eling and
Marek
(2013)

126 insurance
companies
from the 27
EU Countries

40 listed life–
health insurers
55 traded
propertyliability
insurers
35 insurance
companies in
the UK and
Germany

Significantly positive or
negative depending on
whether there is

separation of the CEO
and board chairman
positions and whether
there is an audit
committee.
Likelihood of CEO
turnover based on poor
performance is
significantly higher in
stock firms than in
mutual firms.

Positive

Organizational
structure

Risk-taking

Board size

Risk-taking

Negative
Publicly-held insurance
companies are
associated with lower
risk.
Negative

1992–2007

Institutional
ownership

Risk-taking

Negative

1989–1995

Insider ownership

Risk-taking

Positive

1997–2010

Compensation

Risk-taking

Negative

Monitoring

Risk-taking

Negative

Ownership structure

Risk-taking

Negative

2009–2013

Source: Author’s own compilation

24


Downs and Sommer (1999) employ insider ownership as a corporate governance mechanism
and document positive association between property–liability companies’ rick-taking behavior
and managerial ownership. Mentioned linkage is especially stronger in less capitalized firms,
however, it diminishes as the level of ownership increases.
Finally, Eling and Marek (2013) examine insurance industry in the UK and Germany and
address compensation, monitoring, and ownership structure as determining corporate
governance factors of risk-taking behavior. The main result of the research is to confirm
existence of significant influence of all mentioned elements on risk taking; more precisely, all
three are found to be negatively correlated with firm risk, meaning that companies with more
independent board members, more frequent board meetings, higher number of blockholders
and higher levels of compensation engage in less risk taking (Eling & Marek, 2013).
Diversity of the empirical studies presented above once again demonstrates complexity of the
concept and motivates further research in this regard in order to supplement gaps in existing
literature.

25