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Are the corporate governance standard in banks in the CEE countries low hanging fruit?

Slomka-Golebiowska, Agnieszka (2011): Are the corporate governance standard in banks in the CEE countries low hanging fruit?

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Abstract

The dominance of foreign capital in banking sector in the CEE countries created vulnerabilities that have been a contributing cause of recent financial crisis in the region. The question is whether the corporate governance structure of banks seemed to constrain or rather stimulate the potential unfavourable scenario, in which the controlling investors would be improving their difficult financial situation at the cost of their subsidiaries during the financial crisis of 2008. The aim of the study is to evaluate corporate governance practices in banks that were listed on stock exchange during the financial crisis 2007-2009 in selected CEE countries: Czech Republic, Hungary and Poland. Those three economies managed to maintain relatively strong position of banking sector during the recent financial crisis in contrast to many Western and some Eastern countries. The quantitative and qualitative analysis focuses on structure and practice of supervisory board based on data gathered from survey sent to the banks, their financial statements, reports on corporate governance and supervisory boards’ report on their activities. The results of the research may be of interests not only to academics, but also to managers, in particular in banks, and regulators. The research confirms that banks in CEE continue being role models for non-financial companies in implementing good standards of corporate governance. The findings reveal that bank’s supervisory boards in the selected CEE countries during the financial crisis of 2008 met the high standards of corporate governance with regard to the number of independent members, appointing independent member on the position of the chairman and chairman of audit committees. The study shows that during the crisis banks in the CEE countries themselves strived for improving corporate governance practices and they made some effort to implement post-crisis recommendations related to establishing risk and remuneration committees and appointing Chief Risk Officer. Banks listed in the Czech Republic and Hungary lag behind those listed in Poland with respect of frequency of audit committee meetings and supervisory board’s engagement in risk management. Increasing number of board committees with larger number of seats for independent board, provided that they do not have majority votes, can be implemented fairly quickly and relatively inexpensively. However the factual improvement of corporate governance of banks depends on professional qualities of the independent board members, their level of engagement in committee activities as well as their ability and willingness to challenge the existing contractual arrangements, in particular those that undermine the position of minority shareholders or other stakeholders such as depositors. It seems that implementing high corporate governance standards with regard to board composition and its committees is just low hanging fruit and could not have significant impact on the potential unfavourable scenario, in which the controlling foreign investors would be improving their difficult financial situation at the cost of their subsidiaries based in Poland. Implementing regulation recommended by the international organization such as European Commission that are well suited for large widely held corporations will not improve corporate governance standards of banks in countries where their ownership structure is closely held.

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