Edited by James R. Barth, Chen Lin and Clas Wihlborg
Chapter 26: Management Turnover, Regulatory Oversight and Performance: Evidence from Community Banks
Ajay A. Palvia* 26.1 INTRODUCTION Bank shareholders, like shareholders of unregulated firms, delegate the monitoring of top management to company boards of directors. Unlike other firms, however, banks are also subject to regulatory monitoring, which has the potential to improve oversight by providing bank boards with additional information or by prodding bank boards to consider existing information more dutifully. To the extent regulatory oversight helps, or forces, bank boards to discipline ineffective management, it has the potential to improve bank governance.1 Regulatory monitoring of banks largely consists of rating banks, communicating the rationale behind the ratings to banks, and initiating either formal or informal actions when important deficiencies in banks are found.2 If regulatory monitoring uncovers information signifying ineffective or inept management, it may lead to the replacement of senior management. This chapter considers the role of regulatory monitoring in promoting better bank governance. In particular, it examines whether regulatory evaluations influence top management turnover and whether such regulatory-induced turnover is associated with better subsequent performance. Numerous past instances of top management replacement suggest that regulatory monitoring can play a disciplinary role in banks. For example, an Office of the Comptroller of the Currency (OCC) bank examination found poor internal controls at a community bank in 2001; soon thereafter, the bank’s chief executive officer (CEO) was fired by its board (OCC, 2002). In more recent cases, Coast Bank of Florida and Westsound Bank, both facing pressure from investigations by bank regulators for loan fraud, announced the resignations of their CEOs...
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