Meanwhile, despite a signiﬁcant body of research in non-ﬁnancial sectors, very few papers
address governance issues in ﬁnancial industry in general and in banking in particular,
although the key aspects of corporate governance apply to banking industry (de Andrés
and Vallelado, 2008). Furthermore, the topic remains relevant and sparks continuous
interest from regulators, as evidenced by regular updates published by the Basel
Committee, including the most recent consultative document (BCBS, 2014).
There is even scarcer evidence on the link between performance and corporate
governance in banking, although the BCBS document emphasizes that sound corporate
governance should contribute to it: “a bank’s board of directors and senior management
are primarily responsible and accountable for the performance of the bank” (BCBS, 2006,
p. 19, par. 57). Moreover, the performance is typically measured by ﬁnancial ratios (return
on equity [ROE] and cost-to-income ratio are quite common) which are restrictive because
they combine both output and input efﬁciencies (Pi and Timme, 1993). Financial ratios do
not control for input prices and output mix (Halkos and Salamouris, 2004). Moreover, the
efﬁciency of banks measured by accounting ratios, such as ROE or return on assets (ROA),
is unstable and is, therefore, challenged as being suitable to determine productive
efﬁciency of banks (Maudos et al., 2002). Efﬁciency derived from production frontier
techniques helps overcome this drawback because “frontier analysis provides an overall,
objectively determined, numerical efﬁciency value and ranking of ﬁrms” (Berger and
Humphrey, 1997). Consequently, this property makes the scores estimated by frontier
techniques particularly useful for policy recommendations (Berger and Humphrey, 1997).
Such an approach is therefore relevant for our study because one of the motivations is to
verify the guidelines set out in BCBS (2014) with respect to board attributes. Nevertheless,
frontier estimation procedures are employed in very rare studies on corporate governance
The recent bibliometric analysis (Lampe and Hilgers, 2015) has put in evidence that the two
most important and widely adopted and diffused methods of efﬁciency and performance
measurement are stochastic frontier analysis (SFA) and data envelopment analysis (DEA).
Both methods allow for benchmarking because they estimate the efﬁciency of each
organization relative to a best-performing peer. Whereas Berger and Humphrey (1997)
point out that it is impossible to identify a dominant approach between the two because of
the uncertainty regarding the true efﬁciency; Lampe and Hilgers (2015) identify that one of
the most inﬂuential application areas in banking is SFA.
SFA is a stochastic model in which inefﬁciency can be distinguished from noise, as
opposed to the deterministic DEA, where all deviations from the frontier are considered as
inefﬁciency, thus making it quite sensitive to outliers and measurement errors. The ﬁrst
advantage of the SFA can therefore be considered in its ability to disentangle a random
error term and controllable inefﬁciency. This assumption seems to be more consistent with
empirical data (Pi and Timme, 1993).
The second advantage of SFA, in its Battese and Coelli (1995) speciﬁcation, is that it allows
a simultaneous estimation of the parameters of the efﬁciency frontier and the coefﬁcients of
inefﬁciency model. This procedure is assumed to be superior to a two-step approach due
to a higher reliability of estimated efﬁciency (Lozano-Vivas and Pasiouras, 2010;Battese
and Coelli, 1995;Greene, 1993;Lensink and Meesters, 2014;Wang and Schmidt, 2002).
Several factors are likely responsible for a relative lack of empirical evidence on corporate
governance practices in banks. First, the banking sector is more heavily regulated
compared to others, with government authorities reducing the ﬂexibility of managerial
decisions. Therefore, the role of corporate governance has been consistently downplayed
as regulation has been considered a substitute, at least a partial one, of internal monitoring
mechanisms (Booth et al., 2002). The interaction between corporate governance,
regulation and bank risk taking is thoroughly discussed by Laeven and Levine (2009).
Second, peculiar features of the banking business model, in particular high leverage, make
PAGE 656 CORPORATE GOVERNANCE VOL. 16 NO. 4 2016