This paper seeks to review the theoretical and empirical literature on the relationship between bank governance and performance, providing a comprehensive understanding of the existing research and offering guidance for investors and regulators on the major points of consensus and disagreement among researchers on this issue. Although the question of what determines the levels of firms’ performance, with special emphasis on the role of the corporate governance, has long been the subject of substantial academic research, it gained increased attention in the banking industry in the last decade due to a series of financial scandals and, more recently, to the global financial crisis. In fact, in the wake of the 2007–2008 financial crisis, bank corporate governance mechanisms received heightened attention, accompanied by the renewed interest in the degree of effectiveness of such mechanisms, and their impact on performance. Given the vast number of influences on corporate performance, such as the numerous characteristics of the board of directors, there is an abundant literature on the determinants of performance. Thus, this paper tries to bring together this diverse body of knowledge into a coherent whole. Banks have unique attributes that interfere with the way in which the usual corporate governance mechanisms work. Thus, the main differences between banks and non-financial firms, which justify that some of the regularities found in the literature on the relationship between a set of corporate governance mechanisms and performance do not hold for banks, are also analysed. Then, we extensively review the literature on the board of directors and its impact on performance in the financial crisis and non-financial crisis periods. Finally, we also survey the (very) scarce research on the relationship between board characteristics and bank failures.
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Complex firms such as those that operate in multiple segments, are large in size, or have high leverage are likely to have greater advising requirements .
Likewise, for de Haan and Vlahu [27 (p. 2)] although “because of the special nature of financial services, most academic papers on corporate governance exclude financial firms from their data and focus on non-financial firms”, there is a substantial, but scattered, research on governance of financial institutions, which contrast to the claim by Adams and Mehran .
CAMELS is an acronym for capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk.
Also, Macey and O'Hara [57 (p. 93)] argue that “to the extent that fiduciary duties lower agency costs by reducing the freedom of management to act in its own unconstrained self-interest, such duties will be especially valuable devices in the banking context because of the inherent difficulties in monitoring banks.”
Public Limited Liability Companies Act § 6–11a.
For example, article 100(2) of the German Stock Corporations Act prohibits supervisory board members from serving on more than ten supervisory boards of any incorporated companies that are legally required to have a supervisory board, although up to five additional directorships are allowable for group companies.
Additionally, SOX, NYSE and Nasdaq have tightened the definition of independent director.
Regulation might also be an additional external governance force that acts at the macroeconomic level—in the banking sector as a whole—and at the microeconomic level—in the individual banks sphere . For example, “as part of their efforts to supervise banks, regulators monitor the functioning of bank boards” [1 (p. 2571)].
See, for example, Scharfstein  who analyses the disciplinary role of takeovers in the context of asymmetric information between shareholders and managers.
Deposit insurance is a means to discourage withdrawals of deposits and short-term funding from banks that would otherwise be solvent .
For Fernandes and Fich [34 (p. 6)] “independent directors are individuals who are not full-time or former employees of the bank, relatives of a bank employee, or current or previous consultants of the financial institution”.
Gilson  supports the importance of director reputation by finding evidence that directors who resign from financially distressed firms subsequently serve on fewer boards of other companies.
A potential disadvantage of outside directors is that they may lack relevant firm-specific information .
A higher standard of responsibility, requirement and obligations for the board of banks as well a set of regulation restrictions, imposed by regulators to ensure the health of the financial system, may, eventually, to make it difficult to attract and retain talented directors . Also, according to Adams and Mehran[12 (p. 136)] “a higher standard of accountability for bank directors and, arguably, well-defined regulatory expectations have led the government to sue directors to recover some of the losses in bank failures, particularly during periods of poor economic performance and large numbers of failures”. The government has stepped up its efforts to recover some losses by suing bank directors, and as a result, banks are finding it more difficult to keep and recruit board members, because directors fear the high risk of sitting on a bank's board .
The explanation for this result is that independent board members may incentive managers to raise more equity capital during the crisis to ensure capital adequacy and reduce bankruptcy risk, which leads to a wealth transfer from existing shareholders to debtholders.
Since agency problems (such as directors’ free-riding) become more severe as a board becomes larger, and thus it is easier for the CEO to influence and control the board, CEO power in decision-making increases with board size (e.g., Jensen ).
The literature refers to the combination of the roles of CEO and chairman of the board as CEO duality. So, CEO duality exists when a firm's CEO also serves as chairman of the board of directors.
Berger et al [108 (p. 1411)] define entrenchment “as the extent to which managers fail to experience discipline from the full range of corporate governance and control mechanisms, including monitoring by the board, the threat of dismissal or takeover, and stock- or compensation-based performance incentives”.
Ellul and Yerramilli , for a sample of 72 BHCs over the 1994 to 2009 period, conclude that board experience and their risk management index (RMI) seem to be substitutes as they find that BHCs that have a larger fraction of independent directors with prior financial industry experience have lower RMI.
In the survey “2012, Board practices report: Providing insight into the shape of things to come”, elaborated in 2012 by Deloitte and Society of Corporate Secretaries & Governance Professionals, 47% of directors indicate industry experience as the most desired skill for board success in the next two years.
Guerrera and Larsen  also discuss the fact that SOX made it more difficult for financial companies to hire financial experts as directors because of the problem of conflicts of interests.
“In stable times, the presence of financial experts among independent directors is associated with higher risk taking and slightly above-average performance. Since financial expertise on the board is related to more risk taking, it is not surprising that banks with more independent financial experts underperform when the crisis hits” [35 (p. 354)].
Specifically, education is proxied by an Ivy League Education. Nguyen et al.  choose Ivy League institutions as an indicator of highly reputable universities. According to them (p. 115), “while not a perfect proxy for academic excellence, there is empirical evidence showing that Ivy League graduates perform better than non-Ivy League ones”. Ivy League institutions are eight northeastern American higher education institutions, including Brown University, Columbia University, Cornell University, Dartmouth College, Harvard University, Princeton University, University of Pennsylvania and Yale University.
For instance, Carter et al.  find a significant positive association between the percentage of female directors and the performance of firms as measured by Tobin’s Q in a sample of Fortune 1000 firms. Barta et al.  evidence that between 2008 and 2010, companies with more diverse top teams were also top financial performers. Also, Campbell and Mínguez-Vera  in Spain and Hutchinson et al.  in Australia stress that gender diversity has a positive effect on performance.
According to him, more diversity on boards of banks and other financial institutions, in particular more women, is not just one of better gender equality, but also one of better corporate governance.
In November 2012, the European Commission proposed legislation that forces publicly listed companies in all, at the time, 27 member states, with the exception of small and medium enterprises, to reserve at least 40% of their non-executive director board seats for women by 2020. However, this legislation aims to accelerate progress towards a better gender balance on the corporate boards and not, at least explicitly, corporate governance.
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This research has been financed by the European Regional Development Fund through COMPETE 2020—Programa Operacional Competitividade e Internacionalização (POCI) and by Portuguese public funds through FCT (Fundação para a Ciência e a Tecnologia) in the framework of the project POCI-01-0145-FEDER-006890.
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Fernandes, C., Farinha, J., Martins, F.V. et al. Bank governance and performance: a survey of the literature. J Bank Regul 19, 236–256 (2018). https://doi.org/10.1057/s41261-017-0045-0