Corporate Governance of Banks in Transition Countries

Abstract

This paper contributes to our understanding of corporate governance in the banking sector by focusing on transition countries. We examine to what extent transitional countries have embraced the wave of new standards introduced by the Basel Committee, the Financial Stability Board or the European Banking Authority. Our analysis focuses on the main governance weaknesses targeted by the new regulatory and governance best practice framework. Questionnaires and interviews cover board composition and functioning, bank’s strategy and risk appetite, risk governance, and incentives. The analysis is carried out in 16 countries in six regions. We show that governance practices of banks diverge within and across countries, shaped by different legislations, supervisory modes and governance frameworks. Responses to questionnaires indicate that board composition and functioning is the weakest governance part of the chain. Besides, board independence remains one of the biggest issues. In most cases, the board is also barely involved in setting and monitoring risk appetite. Finally, in most countries compensation is tied to short term business performance rather than to governance values and strategic goals. Overall, the large majority of surveyed banks present an embryonic risk culture and boards have a vast agenda ahead, beginning with strengthening risk management and changing incentives.