Does Bank Institutional Setting Affect Board Effectiveness? Evidence from Cooperative and Joint‐Stock Banks

Manuscript Type Empirical Research Question/Issue Do cooperative banks suffer from board deficiencies less frequently and severely than joint‐stock banks? To answer this question, we analyze banks operating in Italy during the period 2006–2012 to examine whether the governing bodies of cooperative banks are less effective in carrying out their duties than those of joint‐stock banks. Deficiencies in the governing body are measured by sanctions imposed by the supervisory authority. Research Findings/Insights Findings revealed that the boards of directors of cooperative banks were sanctioned more often than board of directors of joint‐stock banks. Furthermore, board turnover mediates the relationship between the cooperative status and board deficiencies. Theoretical/Academic Implications This study provides empirical evidence in support of the weakness of corporate governance in cooperative banks. Methodologically, our approach is novel in that we adopt a measure of board effectiveness/deficiency based on an independent third‐party perspective (supervisory authority) that is not biased by the different objective function of the two types of banks. Practitioner/Policy Implications The findings have several policy and managerial implications. We contribute to the ongoing debate on the proposal for flexible regulation of corporate governance for cooperative banks and emphasize that policy‐makers and regulators should rethink the corporate governance structures of cooperative banks. In particular, the study reveals how board turnover should be carefully monitored to reduce board deficiencies at the bank level.