Corporate governance structure and efficiencies of cooperative banks

• Date: 01 October 2017
• Author: Nobuyoshi Yamori,Kozo Harimaya,Kei Tomimura
• Published date: 01 October 2017
• DOI: http://doi.org/10.1002/ijfe.1593

RESEARCH ARTICLE

Corporate governance structure and efficiencies of

cooperative banks

Nobuyoshi Yamori

1

| Kozo Harimaya

2

| Kei Tomimura

3

1

Research Institute for Economics and

Business Administration, Kobe University,

Rokkodai‐cho, Nada‐ku, Kobe, Hyogo 657‐

8501, Japan

2

College of Business Administration,

Ritsumeikan University, Ibaraki, Osaka

567‐8570, Japan

3

Faculty of Business Administration,

Aichi University, Hiraike‐cho, Nakamura‐

ku, Nagoya, Aichi 453‐8777, Japan

Correspondence

Nobuyoshi Yamori, Research Institute for

Economics and Business Administration,

Kobe University, Rokkodai‐cho, Nada‐ku,

Kobe, Hyogo 657‐8501, Japan.

Email: yamori@rieb.kobe‐u.ac.jp

Funding information

Japan Society for the Promotion of Science

(JSPS), Grant/Award Number: 15H03366

JEL Codes: G21; G29

Abstract

How to discipline managers of cooperative structured financial institutions

(co‐ops) is considered a critical issue by the Japanese financial regulatory

authorities because co‐ops play a significant role in the domestic banking

market, especially for small and medium‐sized enterprises. This paper seeks

to clarify whether the effect of the governance‐related variables on firm perfor-

mance varies across stock and cooperative banks in Japan. We consider

regional banks as a proxy of stock banks and Shinkin banks, one of the

representative co‐ops, as a proxy of cooperative banks. We use cost and profit

efficiency scores obtained from stochastic frontier analysis as performance

measures. The results in this paper confirmed that having a large number of

board members has negative effects on efficiency measures for both stock and

cooperative banks. On the other hand, the presence of outside directors has a

significant effect on efficiency measures for cooperative banks, whereas such

variables have no significant effect for stock banks. These results suggest that

outside directors'discipline is more necessary for cooperative banks than for

stock banks, which are under strong pressure from shareholders. For coopera-

tive banks, a high ratio of representative council members, which is the most

important decision‐making body for Shinkin banks, has negative effects on

efficiency measures. Our findings support the current proposals of the financial

regulatory authorities'council to appoint outside directors to the board as a

means for strengthening governance of the co‐ops.

KEYWORDS

bank performance, cooperative banks,corporate governance, efficiency, Japanese economy, outside

directors, stock banks

1|INTRODUCTION

In many countries around the world, cooperative struc-

tured financial institutions (co‐ops) play an important role

in the financial system. According to the latest statistics,

some 56,000 credit unions serving 200 million members

in 101 countries continue to operate despite the recent

financial crisis.

1

Japan is no exception. Co‐ops still hold

more than a 20% share of household deposits in Japan.

However, after the economic bubble burst in the early

1990s, many co‐ops went bankrupt due to non‐performing

loans. These bankruptcies had several causes, but Japan's

financial regulator reported that there were serious man-

agement problems in many co‐ops that went bankrupt.

According to the system of corporate governance, each

owner of the co‐op has one vote, whereas at stock

Received: 21 May 2016 Revised: 2 August 2017 Accepted: 16 September 2017

DOI: 10.1002/ijfe.1593

368 Copyright © 2017 John Wiley & Sons, Ltd. Int J Fin Econ. 2017;22:368–378.wileyonlinelibrary.com/journal/ijfe