1. Effective corporate governance mechanisms for the banking industry
Ellen Yu
LCCGE Monthly Seminar Series
Birkbeck College
24 February 2017

2. Research Question Purpose of bank Shareholder model
- Maximise shareholder value
Executive compensation (pay dispersion)
Direct monitoring
Public enforcement
Stakeholder model
- Balance interests of all stakeholders
Executive compensation (pay equity)
Private enforcement (Soft law)
Cultural differences
&
Legal environment

3. Design of executive pay remuneration
Executive compensation literature – pay dispersion:
Tournament theory (favoring greater pay dispersion) or
Equity fairness theory (arguing for smaller pay dispersion)
However, the emphasis on executive remuneration design varies from one country to another - depends on whether other direct monitoring alternatives are available.
Lack of relevant empirical studies in the banking literature
Comparative studies are relatively rarer.
“A Golf tournament”? “Racing”? “A baseball game?”

4. Literature Review and Hypotheses Tournament Theory vs the Equity Fairness Theory
Lazear and Rosen (1981):
Good examples in professional sports
Empirical evidence on the tournament theory obtained from business settings is rather limited and somewhat mixed.
the Equity Fairness Theory
Wade, O’Reilly and Pollock (2006), Lazear (1989)
large pay dispersion can increase envy and dysfunctional behavior among team members.
Evidence
Supporting - Studying university faculties, Pfeffer and Leangton (1993)
Hypothesis 1:
Executive pay dispersion brings a positive impact on bank performance and market valuation.

5. Literature review Cultural differences
Cultural variables have only recently gained acceptance in the finance literature. (Zhu and Cai 2014, Zheng et al , Aggarwal and Goodell 2014).
To include Hofstede’s (1998, 2001) cultural dimensions as control variables
Individualism index
Power distance index
Masculinity index
Uncertainty Avoidance index
Hypothesis: Bank performance is positively associated with a national cultural dimension

6. Theoretical Model - Example
where the control variables
Such as the variable of capital adequacy, the variable of default risk, ownership (widely owned) respectively

7. Data Collection - Key variable of executive pay dispersion
Sample
63 banks chosen from OECD countries (18 developing countries) and 29 banks from two developing countries, China and India, and covers the period from 2004 to 2012.
The greatest challenge - “executive pay dispersion” based on total compensation

9. Civil - Tobin Q

10. Developing - Profit

11. Hypothesis 2 Hypothesis 2:
Table 13 Summary of our empirical results on our hypothesis 2
Hypothesis 2
Hypothesis 2:
Effective corporate governance structure brings a positive impact on banking firm performance. Better corporate governance structure, greater bank performance and market valuation.

12. Hypothesis 3 Hypothesis 3:
Table 14 Summary of our empirical results on our hypothesis 3
Hypothesis 3
Hypothesis 3:
we predict that pay dispersion is more strongly associated with banking firm performance with effective corporate governance structure.

13. Hypothesis 4
Hypothesis 4: The positive association between firm performance and executive pay dispersion is stronger in firms with strong public/private enforcements
Public enforcement: this index is developed by Djankov et al. (2008).
private enforcement, named as the anti-self-dealing index, for 72 countries.

15. Hypothesis 5

16. Conclusion
In this study, we examine effective governance mechanisms for the banking industry.
Legal enforcements being the key factor to all our sample banks since these enforcements can enhance banking performance.
We also find that for Civil Law and Developing country banks, the national cultural differences affect bank performance. This is in contrast to Common Law country banks.
Direct monitoring also works for Developing and Civil Law country banks.
If the executive pay dispersion is used as the only one dimension of incentive contract, it may not be an effective governance mechanism for supervising banks’ managerial team.