Board composition and bank performance in a small island developing state: The case of Curacao/Composici
| Autor | Muller, Sherma |
| Cargo | Research article |
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Introduction
Corporate Governance can be defined as arrangements intended to align company objectives and ensure that the rights of firm stakeholders are not violated (John & Senbet, 1998). The Corporate Governance framework is comprised of three basic components, namely: contracts to align objectives, procedures to resolve conflicts of interest, and supervision mechanisms.
The Supervisory Board of an entity is accountable for the behavior of the firm and controls the company's general policies (Centrale Bank, 2001). The effectiveness of a Supervisory Board is highly dependent on how well directors work together as well as individually (Centrale Bank, 2001). Therefore, the board should continually evaluate its efficiency and take the proper steps to enhance its performance. Alongside the required knowledge, the board composition--Board Size, Multiple Directorships, and Gender Diversity, among others--are factors that impact the Supervisory Board as a whole and may influence the effectiveness and the decision-making process. For instance, small boards have been positively related with company results (Yermack, 1996), as it is easier to reach consensus, make decisions, and monitor the firm; Multiple Directorships can help the organizational performance because board members linking a firm to its external environment can foster access to critical information and valuable resources that help reduce asymmetric information for strategic actions (Beckman, Haunschild, & Phillips, 2004), the same argument can be expanded to companies' CEOs interactions (McDonald and Westphal, 2003). Gender Diversity on boards can promote a more optimistic environment, extend dialogues on strategic matters, and decrease conflicts and agency costs (Wilson, Wright, & Scholes, 2013).
All companies, no matter size, public or private, long standing, or recent startups should be properly informed and pay attention to good governance practices, as Corporate Governance has become imperative to the business world. There is no debate that Corporate Governance practices have an impact on the performance and long-term viability of a firm (Kose & Senbet, 1998); however, it is important to find the right balance concerning Corporate Governance practices, as all practices do not fit all.
An efficient financial sector contributes to a better standard of living by reducing the risk and costs associated with the production and trading of goods and services (Herring & Santomero, 1995). Good Corporate Governance in the banking industry is of great importance and will continue to increase given the risk and challenges the banking industry permanently faces (Herring & Santomero, 1995). It is vital to protect the interests of the stakeholders, improve transparency and compliance with the law and increase bank performance.
Following the financial scandals of WorldCom and Enron in 2002 and the global financial crisis in 2008, the importance of Corporate Governance continues to grow. Many supervisory entities dedicated a substantial amount of time and resources towards the development of sound Corporate Governance policies. In addition to the OECD's efforts, the Basel Committee has been effective in obtaining information from collective supervisory experience of the Basel members and other supervisory authorities to issue specific guidance in this topic in efforts to promote safe and sound banking policies (Basel Committee, 2015a).
Over the past few years, the Central Bank of Curacao and Sint Maarten has been vigorously encouraging Corporate Governance in the financial sector (Centrale Bank, 2001). Both Guidance Notes for the Board of Directors of Supervised Financial Institutions, and a concise document of Best Practices Guidelines on Corporate Governance were introduced in 1996 (Centrale Bank, 2001), the Guidance Notes enclosed the legal obligations of directors, the role of the audit committee, and the conventional responsibilities of the board. The Best Practice Guidelines comprised a discussion and presentation of various systems, policies and measures useful in coping with Corporate Governance issues within financial institutions. The Central Bank of Curacao and Sint Maarten requires an annual statement of Compliance with Best Practices guidelines on Corporate Governance, these guidelines should be prepared by the board of directors of all supervised financial institutions and naturally reviewed by an accounting firm to be valid. The Central Bank of Curacao and Sint Maarten measures the Corporate Governance improvements through on-site examinations and through reviewing the statement of compliance provided, besides, the Central Bank's rules and regulations further comprise a periodic management report, which entails a briefing by management on the performance of a bank and the reflection of the future direction of the institution, supervisory regulation related to extension of credit to persons directly related to the institution, and supervisory regulation related to restrictions on transactions and limitations to extension of credit (Tromp, 2019).
Board composition and its effect on Firm Performance has been one of the Corporate Governance topics that have been brought forth in many studies. Nevertheless, as far as the authors have investigated, there is no research done in this area for Small Island Developing States (SIDS); these are a diverse cluster of 52 developing countries fronting particular social, economic, and environmental vulnerabilities (UNOHRLLS, 2013). Curacao is a small island and one of the challenges, as mentioned in the article of Frielink (2017), is that there should be less discretion when appointing people in important positions, such that the interests of companies and stakeholders are protected and the firms can be successful in the long run. Having the proper supervision is vital in such cases; however, to achieve that, the best practices ranging from Board Size, Gender Diversity to Multiple Directorships, should be known to ensure having an efficient and effective board (Matroos-Lasten, 2019).
A challenge of a small island economy such as Curacao is that the companies are usually smaller compared to other economies and therefore occasionally have a less demanding structure, which often makes it more challenging in terms of good Governance (Minto-Coy, Lashley, & Storey, 2018; Sannegadu, Henrico, & van Staden, 2021). Another challenge is separating personal relationships from business matters (Goede, 2008). Having the correct social contacts in the recent years have grown in importance; as social relations are informal it has become difficult for some to separate personal relations from business issues. Others question if the decisions made within the companies are based on personal interests or based on the best interests for the stakeholders. According to the agency theory, a principal-agent conflict will derive from the separation between ownership and control (Jensen & Meckling, 1976); the magnitude of agency conflicts in a company is contingent to the institutional setting in which it functions, when formal institutions are weak, agents are more propitious to look after their own benefits (Lien, Teng, & Li, 2016). Good Corporate Governance schemes reduce the presence of agency costs.
What can the companies do to ensure that their choices are aimed to enhance outcomes for the stakeholders? Despite all the previously done research in what is considered best practices, there is no empirical information available on the matter regarding Board Size, Gender Diversity, and Multiple Directorship for companies operating in SIDS. It is therefore important to understand the influence of these Corporate Governance arrangements on bank performance for this particular context.
In summary, the objective of this study is to analyze through the lens of agency theory the relationship between Supervisory Board Size, Gender Diversity, and Multiple Directorships on performance in the banking industry of Curacao, which as of today has not been empirically studied in the island. Throughout this study we will take a closer look at these Corporate Governance practices and how they relate to bank performance in this context. This study will further add to international literature and research on Small Island Developing States (SIDS). Most of the available information concerns Europe or the United States of America (USA), which are big economies, while island states represent the smallest economies in the world (Kurecic, Luburic, & Kozina, 2017). Furthermore, this study will help to create awareness in the financial sector on the potency of 'good governance' in a local context. The findings of this research are of importance to the supervisory board of directors, top management, shareholders, regulators, customers, auditors, and other stakeholders.
Information was captured from the annual reports of local banks and their subsidiaries. Results obtained through linear regression analysis, using the ordinary least squares method, indicate that there is a negative association between Board Size and Gender Diversity on Bank Performance. On the contrary, Multiple Directorships positively relate with banks' outcomes. According to national regulations in Curacao, a minimum of three Supervisory Board members are recommended for insurance companies and credit institutions (Centrale Bank, 2001), but there is no indication regarding a maximum number of members. Furthermore, there are neither Gender Diversity requirements nor regulation on Multiple Directorships. These findings can provide new insights to incorporate in the legislation and improve bank performance.
The rest of this study is organized as follows: section 2 deals with the literature review and hypotheses formulation; section 3 refers to the data, variables, and methodology employed in the study; section 4 presents results from the data analysis; and section 5 concludes and...
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