This thesis investigates the connection between change in the institutional environment and governance practices in the banking sector following the financial crisis of 2008. We consider systemically important banks in North America and Europe at three points in time to search for changes in corporate governance systems and relate the developments to primarily drivers in regulative, normative and cultural-cognitive institutions. The analysis and the discussion build upon agency theory, stakeholder theory and new institutional theory, and we combine quantitative and qualitative findings in a method inspired by clinical research in finance.
Our discussion revolves around three broad groups of variables within corporate governance: (1) internal governance structures, (2) board composition and committees, (3) executive compensation, and (4) ownership structure. In the first category, we note how the regulative pillar has influenced banks e.g. to increase disclosure and to adopt say-on-pay provisions. Given the high degree of complexity in bank governance, public opinions on internal governance have been heard only to a limited extent, and the cultural-cognitive pillar is therefore of minor importance. We observe a variety of stakeholders active within the normative pillar, which have opted for changes to governance structures, most importantly through governance codes. For example, say-on-pay has in several instances been introduced on a voluntary basis following recommendations from influential organizations. Yet, the issue is also treated by regulators in some jurisdictions and we note changes in the cultural-cognitive pillar which also advocate broad adoption of the provision. Our case analyses highlight the interconnectedness of the pillars and how the forces can become mutually reinforcing, which supports a holistic institutional perspective in corporate governance.
We further note how changes in banks’ board compositions and committees coincide with developments in the institutional environment. Some of the changes are motivated by regulation and normative pressures (e.g. director independence and banking experience), but we note, interestingly, how other variables correspond well with what the broad stakeholder community demands. For example, all banks in our sample had introduced separate risk committees following the crisis, in line with a heightened awareness of and concern for risk-taking in systemically important banks. Thus, the cultural-cognitive pillar may have been effective in influencing bank governance without possessing any formal authority.
Much debate has revolved around the composition of executive compensation packages over the past decade, and several influential normative codes have been published. Three essential facets have characterised the contents: (1) more equity, (2) more deferrals, and (3) a larger share as fixed base salary. We observe all of these in our results which indicate responsiveness among banks to normative pressures. Our account of the institutional changes highlights how the cultural-cognitive pillar has been less effective while regulators have been hesitant to interfere in banks’ internal dealings. The
100 explicit intent among many banks to comply with normative codes signals a broad concern and awareness of the institutional environment. Yet, different stakeholder groups act in concert and disregard for the interconnectedness between the three pillars may result in an overly simplicity perspective on the influences of institutions on banks.
Albeit highly relevant within the overall corporate governance, the ownership structure is at banks’
discretion only to a very limited extent. Thereby, it differs in a meaningful way from other governance tools and may call for other analytical approaches. Still, concentration has increased in line with normative statements which advocate increased shareholder activity. Our results do not support the three pillar framework as an appropriate framework for explaining the change, though, as much of the change to ownership structures appears to be driven by the economic climate and by individual investors’ vested considerations. In particular, several large shareholders have entered as owners through significant capital injections which amount to rescue action in undercapitalised banks at the brink of bankruptcy. Ownership concentration is nonetheless interesting to consider in the institutional framework as it may constitute part of the environment and act as a catalyst for effective implementation of practices in other parts of the governance structure, once more stressing the importance of interrelated institutions.
Relating back to our initial question, we conclude that although our findings are highly indicative, they provide some support for the usefulness of considering institutional change to explain development within firms’ corporate governance practices. It appears that the developments we observe coincide with the changes we identify in the institutional context, and that the subsequent pressures to comply with demands set forth constitute part of the explanation behind the introduction of new governance practices. Our case analyses underscore the importance of considering particular aspects of the individual bank along with changes in its institutional environment in understanding corporate governance regimes. In brief, some links are ambiguous, and interrelationships between stakeholder groups and institutional trends are hard to disentangle, but there are many changes to governance practices which we provide feasible explanations for by relating banks’ operating environment.
Thereby, we find some support for the notion that rational agents are influenced by their environments when designing corporate governance systems, and that not only formally binding constraints and regulations matter.
Our findings carry relevance beyond the banking sector and are useful as a first indication of the linkages between institutions and corporate governance. Hopefully, our methodology and insight will provide a starting point for more sophisticated hypothesis formulation going forward, for theoretical elaboration on the linkages between firms’ governance and their surroundings, and thereby for a more varied view on corporate governance research. In particular, future research should develop on the role of creditors in the institutional setting and on the complex topics of isomorphism and reverse
101 legitimacy which we present some support for. Further, we recommend a more thorough account of the adjustment process to institutional pressures in order to establish causality with better certitude.
Finally, our tests should be applied to a broader sample over a longer time horizon to assess the impacts of a crisis.
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