Corporate Governance and Access to Finance - ESBG

They also report that the impact of state ownership on growth dependson the quality of a country's political institutions and governancestructures. Their measure of private credit captures to some extentfinancial depth, and therefore the extent to which an economy makesuse of financial intermediation.Corporate Governance practices in the public financial sector, andspecifically for state controlled banks, tend to emphasize aspects like therespect for market institutions, restraining political interference, fosteringaccountability as well as a certain degree of agency independence,transparency in decisions and integrity of their members, which meanscompliance with the banking sector standards and codes. Moreover, theOECD Corporate Governance principles also hold for governmentcontrolled banks, including aspects related to the qualification ofmembers of their governing bodies, accountability, effective internal andexternal auditing and compensation schemes according to the bankethical values and strategy.In practical terms, good Corporate Governance practices entail thedisclosure of board of directors’ guidelines, introducing training programsfor directors, appointing auditing committees with clear and explicit rulesunder the control of independent directors, or the separation of thefinancial and non financial business. Encouraging stakeholders’participation in the governance of banking institutions, as well astransparent reporting or regular evaluation of the executives and boardperformance also increase confidence of stakeholders, especially whenthe institutions are under government control.Adrianova et al (2009) point out that the negative view of governmentowned banks – assuming that politically motivated banks make badlending decisions, resulting in non-performing loans, financial fragilityand slower growth, based on La Porta et al. (2002) findings – is notempirically supported. The coefficient of government ownership of banksbecomes insignificant in their regressions explaining economic growth.These findings suggest a robust association of government ownershipof banks with long run growth rates once controlling for countriesinstitutions. Their explanation, from Adrianova et al (2008), is thatgovernment ownership of banks is the result of institutional weaknessesrather than the desire of politicians to control banks. A similar view canbe found in von Weizsaker et. al (2004), which argues in favor of “publicownership but with a strong independent regulation”.104