Directors help determine the strategic direction of a corporation and are responsible for ensuring the institution has a good system of internal control. Banking institutions without a strategic direction emphasizing sound lending practices that promote the long-run financial health and viability of the institution will be sued more frequently than peer institutions. Institutions that do not have a good system of internal control will also be sued more frequently. Hence, legal expense is a bank corporate governance measure. We compare the performance of bank legal expense and a widely cited corporate governance index in a regression framework to determine which better predicts bank performance. The regressions indicate legal expense is a much better predictor, hence a better measure of bank corporate governance. Regulators should require legal expense reporting and rank institutions by the ratio of legal expense to assets to help identify institutions with weak governance. Seven case studies illustrate the role of legal expense in corporate governance.
We thank Ed Kane for suggesting the empirical tests used here. We also thank Allen Berger, Scott Barnhart, Lamont Black, Steve Dennis, Bob DeYoung, Curt Hunter, Steven Kane, Tom Lindley, Melinda Newman, James Thompson, and Larry Wall for very helpful comments and discussion of our earlier research in this area. We are solely responsible for any errors or omissions.
McNulty, J. and Akhigbe, A. (2015), "Toward a Better Measure of Bank Corporate Governance", International Corporate Governance (Advances in Financial Economics, Vol. 18), Emerald Group Publishing Limited, pp. 81-124. https://doi.org/10.1108/S1569-373220150000018004Download as .RIS
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