Corporate Governance, Board Turnover and Performance: The Case of Local Banks in Italy
Paolo Baffi Centre Working Paper No. 01-150
Posted: 13 Nov 2001
Date Written: November 2001
This paper sets out to clarify the pattern of evolution of the local bank model in Italy by systematic study of their distinctive institutional and economic features. From the institutional point of view, local banks have historically adopted three different forms of governance in Italy: the savings bank, the cooperative banks and the mutual bank. These institutional arrangements have affected the choices and results of local banks in different ways. Both the cooperative bank and the mutual bank models have generally achieved positive performances in terms of value creation, demonstrating that cooperative private ownership continues to correspond to the needs of local banks. Savings banks have turned in poorer performances, despite their transformation into companies limited by shares. This shows the limits of their governance model, which is still based on public ownership exercised by "bank foundations".
The unification of the international financial markets is having significant effects on the production and distribution of bank products on both the assets and the liabilities side. This holds, in particular, for the supply of outsourced products and corporate financial services. The future success of local banks thus depends partly, if not primarily, on their ability to combine strong local roots with expansion and improvement in the supply of financial services. This ability will be the greater, the more local banks' corporate governance machinery is able to ensure prompt and efficient response to the stimuli of the market.
A good indicator in this last regard is the degree of stability of management in the case of successful local banks and the speed with which management is replaced in the case of banks in difficulty. The empirical part of our work brings to light a marked stability of corporate boards in cooperative banks and in many mutual banks as well, which is not matched in the case of savings banks. On the other hand, we show that disappointing performance has failed to trigger the necessary radical change of directors in a significant number of cases among savings banks. Thus, although many savings banks, especially in central and northern Italy, have recorded good results, their governance model appears inadequate to ensure the maintenance of corporate efficiency in a setting of heightened competition.
Keywords: governance, banks, Italy
JEL Classification: G21, G32, O50
Suggested Citation: Suggested Citation