Utilizing Corporate Governance in Strategy Formulation and Execution

Utilizing Corporate Governance in Strategy

Formulation and Execution

Section 1: Foundation of the Study

Ineffective corporate governance was the primary cause in well-publicized

instances of excessive managerial risk-taking in the financial sector that led to the

financial crisis in the first decade of the 21st century (2007–2009), further adding to

uncertainty about boards’ ability for oversight (McNulty, Florakis, & Ormrod, 2013).

Effective monitoring is the ability (a) to be objective, (b) to comprehend the issues at

hand, (c) to devote requisite time plus attention, and (d) to exert an individual’s self on

behalf of shareholders (Hambrick, Misangyi, & Park, 2014). The common cause of the

subprime mortgage crisis and a resulting housing market crash was weak oversight,

which led to excessive risk-taking and created incentives for banks to maximize shortterm

profits by pushing subprime lending (Dymski, Hernandez, & Mohanty, 2013).

Ineffective corporate governance manifests beyond the most recent financial crisis

despite various governance factors and preventing practices; a typical organization loses

about 5% of revenue each year to various forms of malfeasance (Yu, 2013). Malfeasance

ranges from (a) the inadequacy of internal controls and lack of oversight, (b) fraudulent

earnings reports, and (c) wrong action or inaction by executives and boards (Soltani,

2014). Contemporary corporate governance issues include (a) inadequate information

safety protocols leading to the breach of privacy data (Rai & Mar, 2014), (b) management

of strategic partnerships (Thorne & Quinn, 2016) with prevention, and (c) management of

corporate crises (Jizi, Salama, Dixon, & Startling, 2014).

Background of the Problem

Ineffective corporate governance was the primary cause in well-publicized

instances of excessive managerial risk-taking in the financial sector that led to the

financial crisis in the first decade of the 21st century (2007-2009) further adding to

uncertainty about boards’ ability for oversight (McNulty, Florakis, & Ormrod, 2013).

Effective monitoring is the ability, (a) to be objective, (b) to comprehend the issues at

hand, (c) to devote requisite time plus attention, and (d) to exert one’s self on behalf of

shareholders (Hambrick, Misangyi, & Park, 2014). The common cause of the subprime

mortgage crisis and a resulting housing market crash was weak oversight, which led to

excessive risk-taking and created incentives for banks to maximize short-term profits by

pushing subprime lending (Dymski, Hernandez, & Mohanty, 2013).

Ineffective corporate governance manifests beyond the most recent financial crisis

despite various governance factors and preventing practices; a typical organization loses

about 5% of revenue each year to various forms of malfeasance (Yu, 2013). Malfeasance

ranges from (a) the inadequacy of internal controls and lack of oversight, (b) fraudulent

earnings reports and (c) wrong action or inaction by executives and boards (Soltani,

2014). Contemporary corporate governance issues include (a) inadequate information

safety protocols leading to the breach of privacy data (Rai & Mar, 2014), (b) management

of strategic partnerships (Thorne & Quinn, 2016), with prevention, and (c) management

of corporate crises (Jizi, Salama, Dixon, & Startling, 2014).

Problem Statement

Corporate governance is a crucial success factor in a firm’s strategy and financial

performance (Volonte, 2015), and when corporations' governance policies are weakly

enforced, organizations can become inefficient and unprofitable (Starbuck, 2014).

Corporate governance became a familiar term with the financial scandals and an

exponential increase in corporate earnings restatements between 1997 and 2002, when

financial markets lost more than $100 billion in market capitalization due to ineffective

governance issues (Mande & Myungsoo, 2013). The general business problem was that

some banking institutions lacked effective governance. The specific business problem

was that some banking leaders lack strategies to identify board selection criteria that

promote effective governance.

Purpose Statement

The purpose of this qualitative single case study was to explore strategies to

improve board selection criteria that banking leaders use to promote effective

governance. The targeted population comprised of banking leaders in one U.S. bank who

demonstrated governance procedures for selecting board members and effective

governance that ensured that the bank did not experience failures or government bailouts

during the last financial crisis (2007–2009). The findings from this doctoral study have

implications for positive social change, including economic and social benefits through

profitable corporations to stakeholders, communities, and the economy. The social

benefits could include enhancing self-worth when individuals remain employed in solvent

corporations and promoting stable thriving families and communities.

Nature of the Study

A qualitative approach was appropriate for this research study. Qualitative

methods are appropriate for describing, decoding, and advancing the understanding of

intertwined past, present, or future eclectic data (Hlady-Rispal & Jouison-Laffitte, 2014).

Qualitative methods with open-ended research questions are appropriate for gathering

comprehensive responses, identifying, and understanding different perspectives (Starr,

2014). Therefore, a qualitative method was suitable for studying effective corporate

governance. An alternative research method that I could have chosen was the quantitative

research method, which is useful for examining relationships and differences among

variables and testing hypotheses (see Frels & Onwuegbuzie, 2013). A quantitative

method was not suitable, as I did not focus this study on testing hypotheses or examining

the relationships or differences among variables. Another possible method is mixed

method research, which is an approach in which a researcher combines quantitative and

qualitative methods in the same research inquiry (Starr, 2014). A mixed method is a

viable option when a research question is multifaceted and complex and the researcher

cannot address the problem by one approach adequately (Caruth, 2013). However,

because semistructured interview questions are best for answering the research question

in this study with comprehensive responses (see Dresch, Lacerda, & Cauchick Miguel,

2015), I employed the qualitative method.

I conducted a single case study to address the purpose of this research. Qualitative

case studies involve the study of a case within a real-life, contemporary context or setting

(Yin, 2014). Therefore, a case study was appropriate for understanding corporate

governance issues from the participants’ ideas and perspectives.

There are several qualitative research designs, including phenomenology,

ethnography, and case studies. The phenomenological approach involves collecting the

lived experiences of individuals with particular characteristics who have experienced a

common phenomenon (Ryan, Lauchlan, Rooney, Hollins Martins, & Gray, 2014). The

focus of this study was on efficacious strategies and processes for selecting board

members; hence, phenomenology would not have been an appropriate design. In

ethnographical research, the researcher is an active and engaged participant who observes

and describes the attributes of a culture-sharing group (Lopez-Dicastillo & Belintxon,

2014). An ethnography would be unsuitable to studying utilizing corporate governance

because it does not involve exploring a cultural phenomenon. As both phenomenology

and ethnography were unsuitable designs for this study, the case study design was the

most appropriate to address the research question.

Research Question

I developed one overarching research question to guide this study: What strategies

do banking leaders use to identify board selection criteria to ensure effective governance?

Interview Questions

I used the following semistructured interview questions to promote exploration of

corporate governance from the perspective of business leaders in one U.S. bank that

demonstrated effective corporate governance and did not experience failures or

government bailouts during the last financial crisis.

1. What are the functions of your board of directors?

2. What are the characteristics of an effective corporate board?

3. What are your board selection criteria?

4. What is the bank’s process for selecting and appointing board members?

5. How has your board demonstrated effective corporate governance?

6. In what ways have your selection criteria demonstrated that they promote

effective board members?

7. What are other selection strategies that you have used for promoting effective

corporate governance?

Conceptual Framework

The conceptual framework for this study was agency theory. Jensen and Meckling

(1976) developed agency theory to explain the inherent conflict of interest between

executives and corporate board members. Key propositions of the theory involve conflict

in corporate leadership characterized by the short-term profit orientation of some CEOs,

versus the long-term viability strategies of the corporation (Bosse & Phillips, 2016). Such

conflict is more prevalent when there is a dichotomy in the strategies required for

shortterm and long-term success and when the CEO role is combined with the chair of the

board of directors (Sarpal, 2014).

In agency theory, the interests of the CEO and shareholders sometimes diverge

(e.g., maximizing short term results versus engaging in long term strategies), which can

result in significant costs and inefficiencies ultimately borne by society (Bosse &

Phillips, 2016). The central premise of agency theory is that managers and shareholders

have different access to firm-specific information, and managers as agents of

shareholders/principals sometimes engage in self-serving behavior by making unethical

or illegal decisions that may be detrimental to long-term corporate interests (Filatotchev

& Nakajima, 2014). Executive largess, ineffective boards, distorted incentive schemes,

accounting irregularities, failure of auditors, dominant CEOs, dysfunctional management

behavior, and lack of adequate oversight have been major causes of corporate

malfeasance (Soltani, 2014).

Krause and Semadeni (2014) noted that a key proposition of agency theory is that

the CEO and board chair roles should be separated, because the CEO acting as his or her

own monitor creates a conflict of interest. Remediating the agency conflict is a primary

corporate governance issue. Sur et al. (2013) concluded that the composition of a board

affects its functionality. A key agency theory premise is that diversity and board

members’ independence from management is an important requirement for controlling

management and protecting shareholder value (Ben-Amar, Francoeur, Hafsi, & Labelle,

2013). Hambrick et al. (2014) proposed to improve the monitoring capabilities of boards

by increasing the proportion of independent directors, customarily defined as those who

are not current or former company employees or otherwise linked to the company or its

managers.

Operational Definitions

CEO duality: The assignment of CEO and board chair roles to one individual

(Krause & Semadeni, 2014).

Groupthink: A psychological phenomenon that arises when a group of people

cares more about avoiding conflict with each other than they do about the quality of the

decision they are making (Carver, 2013).

Incentive contract: The attachment of performance targets to equity grants (such

as stock options) to strengthen the association between executive compensation and firm

performance (Abernethy, Yu Flora, & Bo, 2015).

Leverage: The debt to equity ratio calculated as long-term debt divided by total

equity at the beginning of the year (Malshe & Agarwal, 2015).

Market capitalization: The valuation of a corporation based on the price of its

shares and stocks. Market capitalization is a proxy for stock market quality (Hartono &

Sulistiawan, 2014).

Poison pill: The board of directors adopts poison pills, which are issued as a

dividend to shareholders of common stock that is triggered when a potential acquirer

accumulates a specified percentage of a target firm’s outstanding shares. The pill makes it

difficult for the potential acquirer to complete a hostile takeover since it substantially

increases the amount that the potential acquirer needs to pay (Rhee & Fiss, 2014).

Risk: The probability of occurrence and the associated consequences of a set of

hazardous scenarios (Gardoni & Murphy, 2014).

Strategic agility: The ability of a company to adapt to the changes in the business

environment or influence the environment; this ability determines its success in gaining

competitive advantage or even survival in the contemporary business environment

(Mavengere, 2013).

Assumptions, Limitations, and Delimitations

Assumptions

Assumptions are facts considered valid without additional investigation (Jansson,

2013). The following assumptions were necessary for me to explore participants’

perceptions of board selection criteria and strategies that business leaders use to ensure

effective governance. One assumption I held was that bank boards are critical to effective

corporate governance. Another assumption was that the composition and attributes of

bank boards are essential to the board’s effectiveness. I also assumed that the participants

in this study were knowledgeable about the subject under study and were forthright and

honest in the responses given to the interview questions.

Limitations

Limitations of a study are the factors that are beyond the control of the researcher

(Greene et al., 2013). The results of this study were limited by the honesty of the

participants in discussing the board selection criteria of their bank. Another limitation

was the degree of forthrightness and candor of my participants in identifying and

discussing all the effective corporate governance practices and strategies that have been

critical to preventing corporate crises and resulting in the success of the bank. Banks are

different in size, customer base, location, and market capitalization; the particular bank

that I selected for my single case study may not be representative of all types of banks.

Delimitations

Delimitations refer to the bounds or scope of the study as defined by the

researcher (Yin, 2014). Delimitations are boundaries that researchers establish before

commencing a study (Mitchell & Jolley, 2014). Corporate governance is a broad area of

research that may have unduly widened the scope of this study beyond the business

problem. This study was delimited to corporate governance in strategy formulation and

execution. I chose a specific community bank located in the state of California in the

United States with board selection criteria that promoted effective governance.

I delimited this study to four participants who were knowledgeable about the

bank’s successful board selection criteria. The participants included board members,

selection committee members of the bank, and bank leaders who had been associated

with the bank for at least 3 years. I selected only participants who had knowledge of the

selection criteria for board members for the bank. The interview questions and the study

were delimited to board selection criteria that are essential for effective corporate

governance.

Significance of the Study

Sustainable success for many corporations results largely from decision-making

and strategic corporate action by the CEO and the board of directors (Mowbray & Ingley,

2013). Sustainable success may benefit corporate stakeholders, including investors,

employees, customers, and the bank’s community. The potential significance of the

findings from my study is that they may positively contribute to business practices that

promote positive corporate banks financial performance and foster effective CEO-level

governance.

Contribution to Business Practice

My recommendations from this study may be of value in determining board

selection criteria that promote effective governance. Board composition that promotes

effective governance could add significant shareholder value. Effective corporate

governance is a determinant of investment decisions for many investors, including

institutional investors with large portfolios in that good governance enables these

institutions to protect their investments (Bushee, Carter, & Gerakos, 2014). The financial

success of large or middle-size businesses and banks may result in economic growth and

stability. The major contribution of this study for business practices is that of identifying

and proposing board member selection criteria that may improve corporate governance,

which could result in better business practices and performance.

Implications for Social Change

The findings from this study may encourage business leaders to adopt board

selection strategies that promote corporate governance. Effective corporate governance

strategies may lead to long-term shareholder value maximization and protect all

stakeholders, including employees, customers, suppliers, and society as a whole

(Bistrova, Titko, & Lace, 2014). The implications of this study for positive social change

may include promoting improved individual welfare and living standards for all corporate

stakeholders.

A Review of the Professional and Academic Literature My goal

in undertaking this study was to explore board selection criteria and strategies that

business leaders use to ensure effective governance. This review of professional and

academic literature pertained to corporate governance, strategic management,

outstanding board member attributes, and board selection criteria. The U.S.

Government Accountability Office (GAO; 2013) estimated the costs associated

with the financial crisis in the first decade of the 21st century at $10 trillion and

attributed the cause to a lack of prudential supervision. Corporate governance

involves a set of relationships among executives of a company, its board, its

shareholders, other stakeholders, and the structure for achieving the objectives of

the company (Dermine, 2013). This review will be composed of five sections: (a)

conceptual framework, (b) history of corporate governance problem, (c) governance

initiatives and strategies, (d) current corporate governance challenges, and (e) board

selection criteria.

There is a wealth of information on corporate governance and board selection in

journals, academic papers, essays, conference papers, texts, and books. I found articles on

the composition of the boards, regulatory reforms, independent auditors, ethics, CEO

requirements, executive compensation, and the role of discretion. I undertook a

comprehensive and iterative search using the following key words and phrases: corporate

governance, board of directors, strategic management, cyber security, strategic

partnerships, corporate crisis, and corporate malfeasance. My literature search

incorporated five databases: EBSCOhost, Business Source Complete, Hoover’s by Dun

& Bradstreet, ABI/Inform, and ProQuest. I also sought information from several

professional publications, print media, commercial, and government websites.

My research strategy was to target relevant literature concerning corporate

governance in academic journals. The primary sources of reviewed articles were from

scholarly articles. My search of databases and relevant items yielded a literature review

that includes 190 sources, including four books and articles from 174 peer-reviewed

journals, 165 of which were published within 5 years of the reference year of 2017. These

165 sources represent 87% of the total sources reviewed, meeting the requirements of

Walden University that at least 85% of literature review references being recent and

peerreviewed items.

Conceptual Framework

Agency theory. Agency theory served as the conceptual framework for this

doctoral study on effective corporate governance. According to agency theory, corporate

governance involves two parties: the agent, typically the owners or executives who makes

decisions, and the principals, who are shareholders of the organization (Conheady,

McIlkenny, Opong, & Pignatel, 2015). Principals rely on the agent to act on their behalf;

they expect company leaders to make competent decisions for the long-term profitability

of the company (Berle & Means, 1991). Problems arise when the agent makes decisions

that do not benefit the principals; from the principals’ perspective, these decisions benefit

the agent’s own utility to the detriment of principals (Jensen & Meckling, 1976). The

divergence of interests are principal-agent problems, or simply, agency problems (Bosse

& Phillips, 2016). Principal-agent or agency problems tend to spur shareholder calls for

active boards to implement effective governance (Jensen & Meckling, 1976).

Corporate boards are expected to follow corporate governance mechanisms and

are responsible for protecting shareholder interests and mitigating agency conflicts

between shareholders and management (Sengupta & Zhang, 2015). Corporate

governance is a set of organizational practices designed to mitigate agency problems

(Moradi, Aldin, Heyrani, & Iranmahd, 2012). Members of the board engage in

corporate governance through the monitoring of executive activities, restraining

managerial discretion, aligning CEO interests with those of the board and

shareholders, and contributing to long-term shareholder value (Moradi et al., 2012).

The primary role of the board is to monitor managerial performance and act in

shareholders’ best interests by delivering a real return on investment (Crespi-Cladera &

Pascual-Fuster, 2014). Improvements in governance reduce the likelihood of default and

the cost of debt, enhancing financial performance (Frantz & Instefjord, 2013). Members

of the board should be engaged in mitigating agency issues, which may include limiting

the CEO’s activity and ability to make unilateral decisions (Crespi-Cladera &

PascualFuster, 2014).

Corporations that have extensive agency problems tend to have heavily-polarized

boards and voting blocs of shareholders (Ayuso, Rodriguez, Garcia-Castro, & Arino,

2014). Members of voting blocs may hold meetings independent of the board and

company executives with the objective of making collective decisions that run counter to

those of the board and CEO (Zhu, 2013). To remediate agency problems, researchers,

such as Alexander, Bauguess, Bernile, Lee, and Marietta-Westberg (2013) and Mitra,

Jaggi, and Hassain (2013), have recommended putting in place a strong and active audit

committee. These audit committees are composed of board members who represent

independence, diversity, financial knowledge, and vigilance (Krause, Semadeni, &

Cannella, 2013). Board members with these characteristics promote effective governance

(Krause et al., 2013).

The purpose of having a board of directors in place in an organization is to

remediate agency problems and champion shareholders’ interests (Sur et al., 2013). An

active audit committee enhances transparency and uncovers discrepancies (Krause et al.,

2013). Del Brio, Yoshikawa, Connelly, and Tan’s (2013) conclusions that board members

must be qualified and capable of undertaking the tasks of monitoring executives’

corporate decisions and allocating resources strategically based on sound fiscal

assessments are in line with Krause et al.’s (2013) findings. According to Jensen and

Meckling (1976), company executives and board members who adopt the tenets of

agency theory follow sound governance strategies and realize strong financial results.

Shareholders benefit from active boards that establish corporate fiscal balance,

govern fairly, and disclose information fully and honestly (Kim & Ozdemir, 2014).

Information asymmetry is a central problem that boards may remedy using agency theory

(Tian, 2014). Information asymmetry is the imbalance in insight into firm strategies,

challenges, operations, and critical issues that occur when managers, and not absentee

owners, are in-charge of an organization (Conheady et al., 2015). When information

asymmetry occurs, the board of directors should put in place the mechanisms for reducing

or eliminating such information asymmetries to ensure shareholder confidence in the

board (Conheady et al., 2015).

The information is asymmetrical or unbalanced, as a typical CEO would have

more internal firm knowledge than the shareholders (Conheady et al., 2015). Srinidhi,

Shaohua, and Firth (2014) wrote that board governance is a mechanism that alleviates

agency problems and information asymmetry with reporting and disclosure. All leaders

involved in corporate financial reporting, internal control, and corporate governance

(boards of directors and audit committees) need to be alert to warning signs such as audit

issues, financial restatements, elevated risk, and lack of disclosure (Franzel, 2014). The

leaders, board of directors, and audit committees must respond appropriately to maintain

integrity and the public trust as failure could threaten capital markets and economic

wellbeing (Franzel, 2014).

Well-governed corporations have boards that are accountable, both fiscally and

morally, to shareholders (Nohel, Guo, & Kruse, 2014). Economists attribute the global

financial crisis that began in 2007 to the financial services and banking industry

(Mamatzakis & Bermpei, 2015), largely because these organizations did not have boards

that were accountable to shareholders. Responsible boards of directors take ownership of

their role and actively oversee the activities of their firms (Nordberg & McNulty, 2013).

Many previous fiscal crises, whether within individual organizations or in industries as a

whole, resulted from a lack of prudent supervision at the board level (GAO, 2013). From

the perspective of agency theory, the board of directors’ accountability to shareholders

includes monitoring managerial opportunism and the potential exploitation of minority

shareholders by majority shareholders (Berle & Means, 1991; Fama & Jensen, 1983;

Jensen & Meckling, 1976).

Not all boards of directors are independent outsiders (Hambrick et al., 2014).

Board members can be internal members who are executives or employees of the

organization, or they can be external members who are not employees of the firm and are

not under the control of the CEO (Hambrick et al., 2014). External or independent board

members are appointed to be independent of the CEO (Crespi-Cladera & Pascual-Fuster,

2014). Their appointments are based on their personal and professional qualities, which

place them in a position to perform their duties without being influenced by any

connection with the company, its shareholders, or its management (Crespi-Cladera &

Pascual-Fuster, 2014).

Investors prefer to invest in organizations with independent boards because these

boards monitor executives, even if there is no definitive evidence of a positive association

between board independence and firm performance (Jensen & Meckling, 1976;

Schnatterly & Johnson, 2014). Al-Najjar (2014) found a positive relationship between

board of director independence, firm performance, and stock performance. According to

agency theory, independent or outside board members act as monitors of company

executives (Jensen & Meckling, 1976), reducing executives’ abilities to act

opportunistically and in their own best interest. In contrast, stewardship theory, when

applied at the level of board members and CEO, creates synergies that positively

influence organizational performance through collaboration within the mechanisms of

trust, confidence, and strategic decision making (Mowbray & Ingley, 2013). Stewardship

theory focuses on managerial and board members behavior and states that the behavior is

pro-organizational and that the key motivating factor for managers and board members is

getting satisfaction from a job well done (Glinkowska & Kaczwarek, 2015).

Board member duties include giving counsel to executives and maintaining civil,

arm’s length relationships between the board and management (Zhang, 2013). Their

control tasks involve monitoring and evaluating company and CEO performance to

ensure corporate growth and protection of shareholders’ interest (Zhang, 2013). Board

members must balance their duties of monitoring and giving counsel, being vigilant to

ensure that quality of governance remains at the forefront of their attention so that

investors’ interests are protected and public interests are safeguarded (Franzel, 2014).

Board members have a responsibility to the organization to maintain confidential

information to which they might be privy but also to filing honest, accurate, and complete

reports (Kim & Ozdemir, 2014). Ramanan (2014) opined that having internal board

members as opposed to external board members increases reporting integrity and that

strong board oversight leads to, rather than inhibits, distorted reporting. Good corporate

governance should incentivize the board members and executives to pursue objectives

that benefit both the company and its shareholders and should facilitate effective

monitoring (Dermine, 2013). According to agency theory, candidates for board

membership should be selected based on their ability to monitor management; because

they are expected to monitor and guide executives, their independence from these

executives is paramount (Fama & Jensen, 1983).

Although scholars such as Al-Najjar (2014) and Crespi-Cladera and PascualFuster

(2014) have expressed a preference for independent directors, Minton, Taillard, and

Williamson (2014) advocated against them. Minton et al. claimed that independent

directors with financial expertise encouraged the increased risk-taking behavior of

banking executives before the global financial crisis. According to Minton et al., an

independent board with financial expertise was strongly negatively associated with bank

performance during the crisis. The corporate governance model for banks relies on

independent directors to ensure shareholders’ interests fuel decisions and steer executives

away from conflicts (Capriglione & Casalino, 2014). Bushee et al. (2014) contended that

investors prefer independent boards because their presence signals effective governance.

In some firms, the CEO is also the chair of the board, while in other firms, the

roles are kept separate and occupied by different persons. Agency theorists claim greater

degrees of board independence result from the roles of CEO and chair of the board being

distinct and separate—in other words, in organizations where CEO duality is not

practiced (Sarpal, 2014). Regulators support organizations in which CEO duality is not

practiced (Sarpal, 2014), and there are higher volumes of trade and higher earnings in

firms with independent boards (Bar-Yosef & Prencipe, 2013). Although Sarpal (2014)

was not in favor of CEO duality, some scholars have approved of the approach. For

example, Alam, Chen, Ciccotello, and Ryan (2014) claimed that the flow of information

from the CEO to the board benefits from CEO duality.

For public corporations in the United States, the Dodd-Frank Wall Street Reform

and Consumer Protection Act (2010) and Securities and Exchange Commission rules

mandate that boards inform shareholders about the board leadership structure and provide

reasons for combining the roles of chair and CEO (GAO, 2013). Firms with independent

chairs, majority voting, and a history of detailed disclosure of voting results in director

elections tend to have a higher firm value (Tobin’s Q) or performance (return on assets

and stock returns) and lower financial risk (Baulkaran, 2014). The practice of splitting the

roles of CEO and chairman or CEO and president in public corporations is becoming

increasingly common in the United States, whether on a voluntary or a mandatory basis,

to enhance corporate independence and transparency (Abels & Martelli, 2013). This

increased separation of CEOs from board chairs has occurred alongside governance

experts’ insistence that the separate leadership structure represents best practice for

boards of directors (Krause et al., 2014).

Board sizes vary among corporations. Boards with fewer than 10 members are

regarded as small and boards with more than 10 members are considered large

(Mamatzakis & Bermpei, 2015). According to agency theory, a large board can be less

efficient than a small board because of an increase in agency conflicts, inefficient

communication, and operation costs (Jensen & Meckling, 1976). Threshold analysis

reveals that, following the financial crisis of the first decade of the 21st century, most

investment banks opted for boards with fewer than 10 members, aiming to decrease

agency conflicts from which predecessor large boards suffered (Mamatzakis & Bermpei,

2015). The resource dependency theory proposes that large boards are beneficial to firms

because large boards are more diversified than small boards, and diversified board

members provide greater expertise, wider access to resources, and higher quality advice

than small boards (Switzer & Wang, 2013). While resource dependency theory favors

large boards, agency theory suggests that large boards are not efficient because they are

rife with coordination and communication problems and internal conflicts among

directors (Switzer & Wang, 2013).

Several factors are associated with ineffective board decision making including

size of boards (larger boards are more ineffective than smaller boards), board

composition, the lack of specific industry expertise, and inadequate time commitment by

directors (Hemphill & Laurence, 2014). While some scholars believe that board size has a

negative impact on performance, consistent with the agency theory, particularly for banks

with boards composed of more than 10 members (Mamatzakis & Bermpei, 2015),

Switzer and Wang (2013) found that large board size and less busy directors are

associated with lower credit risk levels, but may not result in effective governance.

Regardless of the board size, the attributes and capabilities of each board member are

important to its functioning and effectiveness (Franzel, 2014).

There are many other governance theories that apply to corporations. The various

theories of corporate governance are polarized between a shareholder perspective and a

stakeholder orientation (Ayuso et al., 2014). At one extreme, governance focuses

exclusively on shareholders, while the other largely neglects financial and market

performance interests of the firm (Ayuso et al., 2014).

Stewardship theory. In addition to the popular agency theory, there are a number

of other corporate governance theories. Stewardship theory is a contrasting concept to

agency theory. According to stewardship theory, agents or CEOs are less likely to base

their actions on self-interest and base them instead on serving the goals of the collective;

in these cases, agents or CEOs act as stewards of the interests of their principals or

shareholders (Donaldson & Davis, 1991).

The premise of stewardship theory is that managers left to their own devices will

act as responsible stewards of the assets they control; the executive and board work

cooperatively toward sustainable organization goals (Schillemans, 2013). Under

stewardship theory, the board is expected to work openly and collaboratively with the

CEO; the relationship between the two parties is trusting and cooperative rather than

adversarial (McNulty et al., 2013). The key constructs underlying stewardship theory are

that the board and management (a) have trust, (b) have mutual interests, (c) derive

motivation from satisfaction in doing a good job, (d) value pro-organization behaviors,

and (e) have no conflict (Glinkowska & Kaczwarek, 2015).

In contrast to agency theory, the relationship between board and management,

according to stewardship theory, is based on trust and working cooperatively on the same

objectives (Donaldson & Davis, 1991). In stewardship theory, financial factors are not the

key motivators for employees, but in agency theory, the work motivators are

predominantly financial (Glinkowska & Kaczwarek, 2015). The stewardship theory’s

philosophy is based on McGregor’s Theory Y while the agency theory’s philosophy is

based on McGregor’s Theory X (Glinkowska & Kaczwarek, 2015). As a result of trust, a

CEO engenders unity in direction, command, and control when he or she also serves as

the chair of the board of directors (Donaldson & Davis, 1991).

Stakeholder theory. Stakeholder theory is yet another governance theory.

Freeman developed the theory in 1994. This theory explains that corporations exist to

represent the interests of different but interrelated stakeholders, all of which deserve

strategic consideration (Moriarty, 2014). Stakeholders include (a) employees, (b)

managers, (c) shareholders, (d) financiers, (e) customers, (f) suppliers also communities,

(g) special interest or environmental groups, (h) the media, and (i) society as a whole

(Harrison, Freeman, & Sa de Abreau, 2015). The proposition is that corporations derive

value through the consideration of all stakeholders and not just the consideration of

shareholders (Claessens & Yurtoglu, 2013).

There are arguments supporting the utility of stakeholder theory. Bridoux and

Stoelhorst (2013) concluded that organizations demonstrate improved firm performance

when fairness is applied toward all stakeholders. Organizations in which stakeholder

principles are upheld are likely to have strong stakeholder support and participation

(Harrison & Wicks, 2013). Following stakeholder precepts is associated with good

management and higher financial performance (Henisz, Dorobantu, & Nartey, 2014).

Stakeholder theory advocates for treating all stakeholders with fairness, honesty,

and even generosity (Harrison et al., 2015). Stakeholder theorists propose that treating all

stakeholders well creates a synergy (Tantalo & Priem, 2014). Moriarty (2014) stated

stakeholder democracy was better for realizing the distributive goal of stakeholder theory,

which is to balance all stakeholders’ interests, rather than the standard corporate

governance arrangement that involves control of the board exclusively by shareholders.

Trusteeship theory. Trusteeship theory (Balasubramanian, 2009) is another

corporate governance theory. This model of governance promotes wealth creation, but is

sensitive to the needs of society as a whole (Balasubramanian, 2009). According to

trusteeship theory, the executive and board are keepers and trustees of the corporation,

and with mounting public pressure arising from corporate governance scandals and

environmental concerns, the concept of the responsibility of companies is changing and

broader corporate governance guidelines are gradually emerging (Pande & Ansari, 2014).

Under trusteeship theory, the CEO, executive management, and board members

behave transparently and conscientiously and act in the best interest of all shareholders

and other stakeholders (Balasubramanian, 2009). The scale and magnitude of corporate

frauds and scams in the 21st century in name of profit represented the absence of

truteeship (Pande & Ansari, 2014). Societal trusteeship is fundamentally oriented toward

the needs of external society and is represented by a willingness to leverage institutional

resources to improve the human condition (Palmer, 2013).

Trusteeship theory extends beyond stakeholder theory in that it addresses societal

expectations and defines the role and responsibility of the organization to the social

environment as a whole (Balasubramanian, 2009). Of particular concern in trusteeship

theory is the wellbeing of those sections of the society that are disadvantaged (Pande &

Ansari, 2014). The agency of trustees and greater diversity among trustees adds to the

organization in terms of dynamism, creativity, innovation, boardroom decision-making

processes, and quality of decisions (Sayce & Ozbilgin, 2014). Trusteeship theory is an

ambitious concept along the lines of Utopian; achieving it requires a transformational

change in people (Pande & Ansari, 2014).

Summary. Agency theory was the appropriate conceptual framework for this

doctoral study on utilizing corporate governance in strategy formulation and execution as

it is focused on strengthening corporate governance. Other governance theories such as

stewardship theory, (Donaldson & Davis, 1991), stakeholder theory (Freeman, 1994), and

trusteeship theory (Balasubramanian, 2009), depend on the premise that the collective

interests of the CEO and shareholders are aligned. These theories assume the cooperative

effort of the groups without the need to monitor executive activities. The lack of

prudential supervision was the chief cause of corporate crises (GAO, 2013). Agency

theory promotes the monitoring of managerial performance (Crespi-Cladera &

PascualFuster, 2014), protects shareholder interests (Sengupta & Zhang, 2015), restrains

discretion, aligns CEO interests with board and shareholders’ interests, and; therefore,

contributes to long-term shareholder value (Moradi et al., 2012).

History of Corporate Governance Problem

Many financial crises have affected the economy of the United States. One such

notable financial crisis occurred in the 20st century: the U.S. savings and loan crisis of

the 1980s. Corporate governance history can be traced to the savings and loan crisis in

which many financial institutions failed (Docking, 2012). More than 1,000 commercial

banks and 939 savings and loans failed from 1980 through 1989 due to lax regulations,

supervision, enforcement, and weak governance (Docking, 2012).

Financial crises were not unique to the 20th century. Banking crises in the 21st

century included the dot-com bubble crisis from 1997 to 2003 during which market

euphoria propelled the stocks of technology firms beyond their market capitalization

(Leone, Rice, Weber, & Willenborg, 2013). In essence, firms that had not declared profit

earned a speculative valuation (Leone et al., 2013). Initial public offerings of many

Internet companies received backing by venture capital firms and were underwritten by

prestigious investment banks (Leone et al., 2013). In retrospect, the behavior of the

venture capitalists and investment bankers is nothing short of a failure in corporate

governance (Leone et al., 2013).

Accounting scandals and corporate governance failures increased in the early

2000s (Henderson, 2013). WorldCom overstated its profits by $3.8 billion by improperly

classifying expenses as investments (Darrat, Gray, Park, & Wu, 2016). Enron moved debt

off its books and presented a misleading financial status (Darrat et al., 2016). Adelphia

collapsed into bankruptcy after it disclosed $2.3 billion in off-balance-sheet debt in an

egregious absence of ethics (Darrat et al., 2016).

Corporate governance is meant to demonstrate awareness of the rules of

operations made by the legal and the judicial system, as well as financial and labor

markets (Claessens & Yurtoglu, 2013). Since the accounting scandals of the early 21st

century, corporate governance issues have attracted increasing attention from researchers,

practitioners, and policy makers (Darrat et al., 2016). The results of corporate governance

can be measured in terms of the performance, efficiency, growth, financial structure, and

treatment of shareholders and other stakeholders (Claessens & Yurtoglu, 2013).

Boards of directors are expected to complement the regulatory oversight of

executives, but the boards of Enron, World Com, AIG, Lehman Brothers, Fannie Mae,

and many others that included industry and social luminaries failed to prevent excessive

risk taking and the ultimate meltdowns and dissolutions of their firms (Henderson, 2013).

The board of directors has authority, in most countries, to hire, fire, and set compensation

for the CEO or the top manager, to set objectives for the firm, and to ask discerning

questions (Hemphill & Laurence, 2014). Some authors believed the boards of many

corporations had hardly changed in decades, resulting in meetings that were almost

entirely a matter of routine (Carver, 2013).

Financial crisis (2007-2009). The same underlying causes of the U.S. savings and

loan crisis of the 1980s (e.g., lax regulations, poor supervision, minimal enforcement, and

weak governance) were evident in the financial crisis of 2007–2009 (Docking, 2012).

Governance of financial services institutions was at the center of the 2007–2009 financial

crisis, during which Lehman Brothers filed for bankruptcy, Freddie Mac and Fannie Mae

was placed under government conservatorship, and the lingering aftereffects of the worst

economic downturn since the Great Depression rippled around the world (Ferguson,

2013). As an example of the lack of governance in financial services institutions,

aggregate bank risk exposure to home equity loans was estimated to be 30% of the total

residential mortgage exposure and approximately $750 billion (LaCour-Little, Yu, &

Sun, 2014).

Governing boards of many financial services institutions seemed unable to

prevent the risk and ill-fated decisions that jeopardized their firms, devastated their

investors, and helped precipitate a financial meltdown that evolved into a global recession

through the creation of derivative securities and collateralized debt obligations (Travers,

2013). Towards the end of the 2000s, the U.S. financial industry entered a period of

unprecedented instability; estimated losses attributed to subprime mortgages were

between $400 and $500 billion (Mamatzakis & Bermpei, 2015). In response to the

financial instability and risk to the global economy, the U.S. Congress, through the

Troubled Asset Relief Program earmarked $475 billion to stabilize banking institutions,

restart credit markets, rescue the auto industry, stabilize AIG, and help struggling families

avoid foreclosure (U.S. Department of the Treasury, 2016).

International proposals for governance promote a shareholder-based view that

governance should serve the shareholders and a stakeholder-based approach that

corporate governance should serve both shareholders and stakeholders (Dermine, 2013).

According to BASEL III, international initiatives complement country-based governance

initiatives (Samitas & Polyzos, 2015). As a result of recurring financial crises attributed

to lax corporate governance, bank leaders began adopting more responsible financial

attitudes in compliance with the new regulatory framework and focusing on ethical

practices (Paulet, Parnaudeau, & Relano, 2015).

Governance Initiatives and Strategies

Various factors contributed to corporate and financial crises. An important cause

of corporate and bank crises is accounting malpractice (Soltani, 2014). Another common

denominator reported in academic writings is executive largesse and lack of adequate

oversight (Filatotchev & Nakajima, 2014). To thwart recurring corporate and bank crises,

there have been internal and external governance initiatives and additional calls for

effective corporate governance and ethics (Alexander et al., 2013; Paulet et al., 2015).

Some internal governance initiatives include (a) increasing the number of independent

board members, (b) separating the roles of CEO and board chair, and (c) strong audit and

nominating committee’s roles (Alexander et al., 2013). Examples of external governance

initiatives include the Sarbanes-Oxley (SOX) Act, Securities and Exchange Commission

(SEC) rules, New York Stock Exchange (NYSE) and NASDAQ regulations, and

international corporate governance (Guo, Lach, & Mobbs, 2015).

Sarbanes-Oxley Act. Governance failures and financial crises led to the

enactment and promulgation of the SOX Act (Guo et al., 2015). The GAO identified and

analyzed 919 restatements announced by 845 public companies from January 1, 1997,

through June 30, 2002, that involved accounting irregularities resulting in material

misstatements of financial statements and results (Franzel, 2014). In 2002, the U.S.

House of Representatives passed House Financial Service Committee Chairman Oxley’s

Corporate and Auditing Accountability, Responsibility, and Transparency Act and

transmitted it to the Senate, where Senate Banking Committee Chairman Sarbanes

submitted the Public Company Accounting Reform and Investor Protection Act (Franzel,

2014). The resulting piece of legislation bears the names of its advocates, SarbanesOxley.

In response to the SOX Act, corporate governance became the responsibility of

corporations, banks, financial institutions, legislative bodies, and the U.S. government

(Guo et al., 2015).

The SOX Act took effect on July 30, 2002, with the intent of strengthening

corporate governance and forestalling future corporate financial mismanagement

(Alexander et al., 2013). As a result of the Act, Congress established the Public Company

Accounting Oversight Board (PCAOB), which required auditors of U.S. public

companies to be subject to external and independent oversight; there would be no more

self-regulated audits (PCAOB, 2017). During the Enron financial crisis, the external

auditor of the firm, Arthur Andersen, continued to issue clean opinions as part of Enron

financial statements until both the auditor and leaders of the auditing firm were indicted

by the Department of Justice in March 2002 for obstructing justice by inappropriately

falsifying the Enron audit (Franzel, 2014). The SOX Act requires management to assess

the effectiveness of its internal controls over financial reporting and to have an

independent auditor attest to and report on the assessment made by management of the

corporation (Alexander et al., 2013).

In the era after promulgation of the SOX Act, U.S. financial institutions have been

subjected to enhanced regulatory oversight, higher corporate scrutiny, higher penalties for

financial misstatements, stringent audit standards, and rigorous audit quality inspections

by the PCAOB (Mitra et al., 2013). Since 2002, when SOX became law, the bailout of

Fannie Mae and Freddie Mac—two large government-sponsored enterprises—cost

taxpayers over $150 billion (Bolotnyy, 2014). Congressional Budget Office estimates

suggest that figure could double by 2019 (Bolotnyy, 2014). Mitra et al. (2013) reported

that inadequate internal monitoring and the absence of effective internal controls is likely

to result in even more agency problems.

The SOX Act provided new rules, the requirements of which were inadequate to

prevent the meltdown of financial institutions in 2008 (Hemphill & Laurence, 2014).

There is a need to learn from the history of events that led to the passage of the SOX Act.

According to Franzel (2014), government leaders should not allow the scale of recent

financial crises to happen again, and stakeholders cannot afford to wait until a full-blown

crisis is impending before making the necessary changes (Franzel, 2014).

SOX has had an effect on the financial reporting process of firms and investors’

expectation about the quality and reliability of reported financial information (Mitra et al.,

2013). Nonetheless, inadequate internal monitoring still provides managers with the

opportunity to make operating and financial reporting decisions that serve their interests

at the cost of other stakeholders (Mitra et al., 2013). There is a large body of work on the

role of the board in corporate governance, including its composition, role of gender,

diversity, committees, shareholder rights and activism, executive compensation, and dual

board structure (Docking, 2012; Hemphill & Laurence, 2014; Leone et al., 2013; Zeitoun,

Osterloh, & Frey, 2014). Many scholarly articles have been published examining the

relationship of corporate governance to financial performance, malfeasance,

sustainability, and data security (Peters & Romi, 2015; Raelin & Bondy, 2013; Rai &

Mar, 2014; Yu, 2013). There is synergy created when the board and CEO are engaged in

strengthening proactive internal control and response governance (Schillemans, 2013).

Much of the literature on corporate governance and the CEO’s role involve

curtailing the CEO’s power and discretion. Filatotchev and Nakajima (2014), Sarpal

(2014), and Srinidhi, Yan, and Tayi (2015) have promoted the separation of the role of

the CEO and chairmanship of the board, CEO tenure, and limitations on strategic

decision making. Few researchers offer practical approaches by which the board should

work with the CEO to optimize the corporate goals and benefit all stakeholders. In

essence, weak internal controls are believed to exacerbate managers’ aggressive

risktaking behavior and their tendency to misreport financial information (Mitra et al.,

2013). Voluntary and mandatory calls for governance reforms by regulatory authorities

may be equally effective, and high-quality corporate governance mitigates the diversion

of managerial resources and improves firm values (Feng & Yue, 2013).

Dodd–Frank Wall Street Reform and Consumer Protection Act. Following

the 2007-2009 financial crisis, the Dodd-Frank Wall Street Reform and Consumer

Protection Act was introduced in both the House and Senate by Financial Services

Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris

Dodd and became law on July 21, 2010 (Dodd-Frank Act; Pope & Lee, 2013). The

resulting piece of legislation bears the names of its advocates, Dodd-Frank Act.

Economic and financial crises brought on by a breakdown in corporate ethics, laissezfaire

regulation, and limited liability in leveraged securitization amongst executives in many

firms that included Fannie Mae, Freddie Mac and Goldman Sachs (Arce, 2013).

The aim of the Dodd-Frank Act is to promote the financial stability of the United

States by improving accountability and transparency in the financial system, to end too

big to fail, to protect the American taxpayer by ending bailouts, and to protect consumers

from abusive financial services practices (Dodd-Frank Act, 2010). The five largest U.S.

financial firms together have assets representing over half of Gross Domestic Product and

one failure means systemic consequences (Hoenig, 2014). The Dodd-Frank Act (2010)

arising in the wake of the financial crisis, is a significant attempt to strengthen corporate

governance by giving shareholders more control over executive pay and making the

board of directors and their compensation committees more independent and accountable

(Conyon, 2014).

The Congressional summary to the 2010 Dodd-Frank Act states that the purpose

of Dodd-Frank Act is to, create a sound economic foundation to grow jobs, rein in Wall

Street and big bonuses, end bailouts and too big to fail, and prevent another financial

crisis (Arce, 2013). In drafting the Act, Congress believed that corporate governance

arrangements before 2010 were weak or ineffective and more needed to be done to curb

excess executive compensation. Before Dodd-Frank, the Sarbanes-Oxley Act (2002)

addressed accounting and financial reforms in the wake of Enron and other corporate

scandals (Conyon, 2014).

Corporate governance had failed to rein in alleged corporate excess; boards and

compensation committees were at the behest of CEOs and were not sufficiently

safeguarding shareholder interests (Conyon, 2014). The canonical approach to the study

of corporate governance in financial economics – agency theory – was created in

recognition of the potential for opportunistic behavior in organizations characterized by

principal–agent relationships (Arce, 2013). Dodd-Frank Act was designed to prevent the

excessive risk-taking that led to the financial crisis by instituting reforms to create a more

stable and responsible financial system that holds Wall Street accountable, discourages

irresponsible financial risk-taking, and ends taxpayer-funded bailouts (Pope & Lee,

2013).

There has been complaints’ regarding increased compliance burden associated

with the rules, increases in staffing required, additional training, and time allocation for

regulatory compliance and updates to compliance systems (GAO, 2015). Title I of the

Dodd-Frank Act was intended to address this issue by requiring the largest firms to map

out a bankruptcy strategy and should bankruptcy fail to work, Title H of Dodd-Frank

would enable the government to nationalize and ultimately liquidate a failing systemic

firm (Hoenig, 2014). Banks controlling assets of more than $10 billion have come to

compose an overwhelming proportion of the U.S. economy, and those with more than a

trillion dollars in assets dominate this group that even one of the largest five banks were

to fail, it would devastate markets and the economy (Hoenig, 2014).

Securities and Exchange Commission (SEC), NYSE, and NASDAQ rules and

regulations. In early 2002, as a response to several corporate scandals, the SEC called on

the NYSE and NASDAQ to design regulatory changes that required boards of publicly

listed companies to have a strict majority of independent outside directors (Schmeiser,

2014). According to Volker, a well-respected economist, subprime mortgage costs

exceeded a trillion dollars for 3 years, indicating it was ill advised to underestimate the

importance of banking regulations (Feldstein, 2013). The 2013 amendments to the listing

standards of the NYSE and NASDAQ, approved by the SEC, require the board to

consider all factors relevant to determining whether the director has a relationship that is

material to the director's ability to be independent from management (Lilienfeld, Cannon,

Bennett, & Spera, 2013). NYSE listing standards Section 303 deals explicitly with

corporate governance standards and specifies that boards must have a majority of

independent directors (Conyon, 2014).

A director is not independent if the director, or an immediate family member, has

been an employee or received fees above a threshold in the last 3 years, is an employee of

the auditor, or has had a financial relationship with the enterprise (Conyon, 2014).

Congress, the NYSE, and the NASDAQ enacted standards to improve the quality of

corporate governance, but voluntary implementation of stronger corporate governance

intended to improve the quality of disclosures and exceeding current corporate

governance standards does not appear to have resulted in disclosures of superior quality

(Harp, Myring, & Shortridge, 2014). These regulations reduced variations in the quality

of financial information available to investors, but more control measures are needed to

affect the kinds of changes needed in the corporate governance system (Harp et al.,

2014).

Additional governance initiatives. Many governance initiatives have been

designed to derive long-term benefits for businesses, banks, and corporations. Lessambo

(2013) insisted that the primary role of the board is to monitor managerial performance

and act in the best interest of shareholders by delivering a good return on investment.

Bistrova et al. (2014) concluded that the role of the board is to enable effective corporate

governance and strategies toward long-term shareholder value maximization and

protection of all stakeholders. Zeitoun et al. (2014) contended that stratified sampling was

best for appointing stakeholder representatives from among qualified candidates to the

board and that this approach would enable the board to act autonomously in the interest

of all. The stratified sampling method of selection should yield diverse board members

that would generate wealth and maintain the sustainable competitive advantage for the

firm (Zeitoun et al., 2014).

Investors often clamor for stronger governance (Bushee et al., 2014). Venture

firms that undertake investments for wealthy clients that are usually willing to take on

more risk (Garg, 2013). Garg (2013) noted that the boards of directors of venture firms

typically include inside directors who have broad industry knowledge and outside board

members who are informed and have professional obligations. Hedge funds are large

investments made by a small group of wealthy and experienced investors (Bebchuk,

Brav, & Jiang, 2013). Bebchuk et al. (2013) explained that activist hedge funds,

motivated by their large financial stakes in firms, often successfully lobby for change at

target companies. Firms with CEO duality, fewer directors nominated by the CEO, higher

levels of outside director ownership, and pressure-resistant institutional shareholdings are

more likely to repeal poison pills because they perceive governance mechanisms designed

to limit managerial opportunism as complements to other mechanisms that minimize

agency problems (Schepker & Oh, 2013). Poison pills are antitakeover provisions that

carry potential agency costs; they are unnecessary when governance is strong (Rhee &

Fiss, 2014).

Audit committees are a type of board that has strong influence over operations,

strategy, and firm performance (Brochet & Srinivasan, 2014). The goal of audit

committees is to protect investors' interests by taking the lead on oversight responsibility

in the areas of internal control, financial reporting, audit, and compliance, as decreed in

Section 301 of the SOX Act (2002). Audit committees are responsible for appointing and

supervising external auditors, reviewing financial reports, overseeing the effectiveness of

the internal control structure of the organization, and overseeing of the whistleblower

process (SOX Act, 2002).

Lin, Yeh, and Yang (2014) wrote that the performance of a board depends on how

all members commit themselves to their supervisory responsibilities. The rising demand

for independent directors resulting from regulations may have led to individual directors

serving on multiple committees with negative governance consequences (Karim, Robin,

& Suh, 2016). Board attendance decreases with multiple directorships, meeting

frequency, and board size (Lin et al., 2014).

There is concern for the impact of multiple directorships on board member

effectiveness (Karim et al., 2016). Choudhary, Schloetzer, and Sturgess (2013) found that

weak disclosure was the chief cause of financial malfeasance. To attain and sustain

corporate financial performance, the firm must balance the wealth creating and wealth

protecting roles of corporate governance (Bell, Filatotchev, & Aguilera, 2013; Raelin &

Bondy, 2013). It is important to probe the factors in board processes that are critical to

board effectiveness (Kakabadse et al., 2015). The number of directorships and mandatory

meeting attendance should be considered when assessing the involvement of new

directors. The combination of busy directors and a complex board can result in poor

meeting attendance and ineffective corporate governance (Lin et al., 2014).

Warren Buffett, an American business magnate, investor, and philanthropist,

emphasized that performance should be the basis for executive pay decisions (Bowen,

Rajgopal, & Venkatachalam, 2014). Buffett recommended that investors should have a

strong preference for businesses that possess large amounts of enduring goodwill,

conditioned upon effective corporate governance and strategic management (Bowen et

al., 2014). Ineffective corporate governance in large individual financial institutions may

have significant impact on the economy (Feldstein, 2013). Effective governance is

typically characterized by higher quality disclosure and strong internal monitoring

mechanisms (Bushee et al., 2014).

To strengthen corporate governance, some have called for some measure of

managerial governance in addition to board governance (Starbuck, 2014). In conjunction

with board governance, it is important to improve managerial governance (Starbuck,

2014) in light of past governance lapses. Many researchers perceive managerial

governance as a form of self-governance that would not result in effective governance

(Feldstein, 2013). Some academic writers support neo-liberalism, which advocates free

markets and less regulations, self-regulation, financial liberation, and deregulation as

stimulants of economic growth (Azkunaga, San-Jose, & Urionabarrenetxea, 2013).

Anginer, Demirguc-Kunt, and Zhu (2014) cautioned that the contribution of a single

financial institution to the deficiency of a system may be more relevant during periods of

market stress. A widely-accepted view espoused by Bushee et al. (2014) is that effective

corporate governance is a determinant of investment decisions for many investors and

allows institutional investors, with large portfolios, to better perform their fiduciary

responsibility to protect their investments.

Since the 1980s, liberalization and deregulation were promoted and drove the

financial entities in the direction of the free market where business leaders could act with

greater freedom (Azkunaga et al., 2013). Past regulations seemed to have a strong impact

initially, but faded as time passed; examples include those made by the SEC in 1933 and

1934 following Black Tuesday, those of the late 1930s following the McKesson Robbins

scandal, after the equity funding and Continental Vending frauds during the 1970s, and

more (Harp et al., 2014). Despite these regulations, corporate scandals continued to occur

across varying industries throughout time (Harp et al., 2014).

Strong corporate governance practices may have encouraged rather than

constrained excessive risk-taking in the financial industry; financial institutions with

stronger and more shareholder-focused corporate governance mechanisms and boards of

directors are associated with higher levels of systemic risk (Iqbal, Strobl, & Vähämaa,

2015). Harp et al. (2014) concluded that compliance with regulations such as SOX in

conjunction with strong ethics education can lead to effective governance for

organizations that continue to produce high-quality disclosures. This behavior reflects the

operating strategies and economic consequences of responsible firm activities (Harp et

al., 2014).

Robertson, Blevins, and Duffy (2013) engaged in the literature review of journal

articles and found that the percentage that was ethics-related increased following the

2007-2009 financial crisis and that most business leaders agree that there is a link

between ethics, corporate social performance, and financial results. In essence, good

ethics is a strategic advantage (Robertson et al., 2013). Pitelis (2013) concluded that for

corporate governance to foster sustainable value creation, there should be an ethical

dimension in managing the affairs of the company. Ultimately, ethics, internal

governance, and legislative and regulatory oversight are important to sound corporate

governance.

Effective corporate governance is important for many reasons, including

prevention of corporate malfeasance and development of organizational resilience in the

face of governance difficulties such as cyber-attacks (Rai & Mar, 2014). All stakeholders

may benefit from efficient management of banks and financial institutions (Dermine,

2013). These benefits extend beyond profit maximization and the corporation; there are

social ramifications for employees, shareholders, communities, and the nation as a whole

(Bistrova et al., 2014). The three primary responsibilities that board members fill involve

control or monitoring, affiliation with external organizations, and expert advice and

guidance (Nordberg & McNulty, 2013). These responsibilities are indicated in both the

agency and stewardship theories.

International corporate governance. There are two primary patterns of board

structure. The unitary board system is commonly referred to as the Anglo-American

system and the two-board system is commonly referred to as the German-Japanese

system, under which the board of directors is responsible for running the company, while

the supervisory board functions as a special monitoring unit (Lee, 2015). The dual board

system features separation of the CEO and independent audit committee (Zeitoun et al.,

2014). Among the advantages of the dual board are the option to appoint stakeholder

representatives to the board, improved monitoring, enhanced corporate governance, and a

focus on the interest of all stakeholders (Zeitoun et al., 2014). Although the dual board

approach promotes checks and balances, this style of corporate governance may be

burdened by high board costs, communication problems, redundancies, and gaps in

internal supervision (Lee, 2015).

There is continued effort to strengthen international corporate governance. The

Financial Stability Board (FSB; 2015), established in 2009, is an international

organization that coordinates various national financial agencies and standards-setting

bodies at an international level. The FSB (2015) is committed to building resilient

organizations. This international body is aimed at developing strong regulatory,

supervisory, and stabilizing international financial markets (FSB, 2015).

Basel III is an international regulatory accord that includes framework and reform

stipulations for banks (Samitas & Polyzos, 2015). With a goal of promoting a more

resilient banking sector, Basel III established rigorous data and quarterly reporting

requirements, disclosure requirements, liquidity risk limits, leveraged ratio framework,

bank supervision, and derivatives. Banks utilize short-term debt to invest in long-term

assets and should enhance their internal governance structure with strong liquidity

requirements, complemented by increased transparency (Ratnovski, 2013). Proponents of

Basel’s regulations and requirements expected financial institutions would already have

the governance structure to comply (Samitas & Polyzos, 2015).

Trends in international governance also include an intensified effort to reform

some important international organizations (Artuso & McLarney, 2015). One of the

targets of international governance reform is the World Trade Organization, which deals

with the rules of trade between nations (Ruggie, 2014). Another target is the International

Labor Organization, which is committed to improving the living conditions of workers,

workers’ rights, and fair compensation for workers (Artuso & McLarney, 2015).

Lessambo (2013) wrote that the non-binding governance model of the Organization for

Economic Cooperation and Development’s 33 developed nations including the United

States become binding. International regulatory framework and organizations are also

concerned with legislation at the national level around the world, including in the United

States, where the focus of efforts includes enhanced risk mitigation strategies such as the

use of derivatives, securitization, credit risk transfer, and currency hedging (Ratnovski,

2013).

Some experts have continued to declare austerity as a necessary governance

measure for international banks, especially in light of debt problems with Greece in 2010

(Anderson & Minneman, 2014). Austerity, a deficit reduction strategy, is characterized

by reduction in government expenditure, tax increases, reduction and elimination of

entitlement programs, and privatization of public corporations; at the international level,

austerity is often a requirement for financial bailout and a means of enhancing the

repayment of public debt (Anderson & Minneman, 2014). Although touted as an effective

measure to repay debt and attain solvency, austerity often has serious ramifications for

the debtor nation which include lower rates of investment and a lower rate of

entrepreneurship, which results in slower growth for the economy (Anderson &

Minneman, 2014).

Nongovernmental organizations, strong media complement investor activism,

and board vigilance. When multinational enterprises collaborate with various

stakeholders, including nongovernmental organizations, in countries with fragile political

frameworks and weak governance structure, there are positive philanthropic, legal,

ethical, and governance ramifications (Kolk & Lenfant, 2013). The media are a powerful

conduit for institutional pressure and for effectively monitoring management (Luo &

Salterio, 2014). As an external governance force on internal management policy, board

vigilance and investor activism have an indirect impact on internal governance systems

(Cohn & Rajan, 2013). This indirect impact often creates corporate value (Cohn & Rajan,

2013).

Current Corporate Governance Challenges

Cyber security, corporate crises, and trade partnerships are among the current

corporate governance challenges. The theft of information and the intentional disruption

of online or digital processes are among the most prominent risks that business leaders

face today (Brewer, 2015). A data breach can be costly in terms of both finances and

reputations (Brewer, 2015), while corporate crises can have long-term adverse impacts on

corporate integrity.

Cyber security. Effective boards require capable, informed, strategic thinkers to

engage in spirited discussions about strategic objectives to keep a corporation competitive

(Vincent, 2015). Corporate data security is a current strategic and governance concern

(Brewer, 2015). Recent cyber incursions have extended beyond retail and healthcare into

many government agencies, energy grids, and critical infrastructure (Brewer, 2015). The

U.S. National Institute of Standards and Technology defines critical infrastructures as the

system and assets, so vital that the incapacity or destruction of such systems and assets

would have a debilitating impact on security, economy, public health or safety, or any

combination of those matters (Colesniuc, 2013).

In 2013, a breach of data at the U.S. Office of Personnel Management

compromised the integrity of personal data from 4.2 million federal employees and 19.7

applicants (U.S. Department of Homeland Security, 2016). Almost 66% of U.S. firms

reported cyber-attacks on critical infrastructure control systems in recent years (U.S.

Department of Homeland Security, 2016). In January 2015, one of the largest health

insurers in the country discovered a cyber-incursion that compromised the personally

identifiable information of approximately 80 million people (U.S. Department of

Homeland Security, 2016).

Standards and guidelines for effective practices to address cyber risks

recommended by the U.S. Department of Commerce (2014) are voluntary, even though

effective corporate governance and strategic management are critical to the success of

organizations and to national security. The advent of computer technology has given rise

to a new type of crime: cybercrime (Strikwerda, 2014). Cybercrime includes the spread of

computer viruses and e-fraud, and has facilitated the rapid propagation of criminal

practices of espionage, sabotage, criminal syndicates, extortion, theft, subversion, and

persecution on a global scale (Strikwerda, 2014).

Security of private information and cyber security are important components of

enterprise risk awareness (Brewer, 2015). Managers, executives, and the board of

directors of organizations have risk oversight responsibilities to prevent cyber security

breaches (Rai & Mar, 2014). The board should ensure periodic checks are conducted

within the organization and know the risks of involvement with third-party service

providers (Rai & Mar, 2014). Corporate governance has many goals, including protecting

against malfeasance and promoting the interests of stakeholders (Yu, 2013).

Corporate governance could play a major role in enhancing data security and

protection of private, confidential, secret, and proprietary information assets. Although

enterprise mobility, including cloud services, may make an organization more productive,

it also creates layers of complexity and risk, making information technology

environments increasingly vulnerable while rendering firewalls and many anti-virus

software programs incapable of preventing well-funded and organized cyber-attacks

(Brewer, 2015). Peters and Romi (2015) found that that board committee member

knowledge, expertise and capability is generally associated with increases in

committeelevel performance, sustainability governance and contributions as a board

member. A well-informed board should be invested in cyber security, remain aware of all

cyber breach attempts against the organization, have regular briefings, ensure the

organization maintains continued relationships with the local and national authorities

responsible for taking action against cyber-attacks, while maintaining adequate cyber risk

insurance (Rai & Mar, 2014). Cyber security constitutes a present and critical corporate

governance imperative (Brewer, 2015).

Robeson and O'Connor (2013) researched the effect of governance board on

performance of firms in terms of innovation and noted that the board influences through

strategic planning and funding that elevates corporate performance. Ensuring cyber

resilience is a leadership responsibility (Strikwerda, 2014). Agency theory suggests that

managers and investors have different preferences regarding security risk; investors can

diversify their capital over different firms to reduce firm-specific risk, but managers

cannot diversify their investment of human capital in their firm (Srinidhi et al., 2015). As

such, managers face greater risk of financial distress during their limited tenure than do

investors (Srinidhi et al., 2015). Cyber security is important to shareholders, the board,

management, and all stakeholders.

Losses in the banking industry caused by white collar crimes have reached

billions of dollars, far in excess of conventional and traditional techniques of bank

robbery, making cyber security an ongoing challenge and a foremost economic and

national security concern (Bambara, 2015). Colesniuc (2013) and Vincent (2015)

indicated that corporate governance plays a role in enhancing data security and protection

of private, confidential, secret, and proprietary information assets (Rai & Mar, 2014).

Data breach incidents are on the rise, resulting in severe financial consequences and legal

implications for the affected organizations (Brewer, 2015). A 2014 report revealed that an

estimated that 12.6 million Americans were victims of identity fraud (Sen & Borle,

2015). In a study by Ponemon Institute on the cost of data breaches released in May 2014,

the approximate average cost per data breach incident was $5.9 million for organizations

in the United States (Sen & Borle, 2015).

Board leadership and composition is a popular focus of many studies addressing

the matter of IT risks (Bambara, 2015; Brewer, 2015; Kumar & Singh, 2013). A

challenge for board members is their ability to understand the emerging technological

advances; the average age of directors has increased from 60.1 in 2002 to 62.6 in 2012

(Kumar & Singh, 2013). There have been many questions raised about board composition

(Kumar & Singh, 2013). The board of directors and efficient corporate governance are

critical to innovation, creating value, and maintaining the competitive advantage of the

organization (McCahery & Vermeulen, 2014).

Corporate crises. Delayed recall of defective products and parts remain a critical

strategic and governance issue. Decisions made concerning a recall are important to a

firm from three standpoints: cost, customer safety, and corporate reputation (Steinbeck,

2014). The repercussions for many corporations may extend beyond consumer

confidence to severe financial impact and tort violations (Jizi et al., 2014). The U.S.

Department of Justice (DOJ) fined Toyota $1.2 billion in 2014 for sudden acceleration

problems that Toyota executives knew about long before the recall compelled the

company to take action (DOJ, 2014).

The board of directors is responsible for the development of sustainable business

strategies and the supervision of the responsible use of the assets of the firm (Jizi et al.,

2014). Banks are being held accountable. The DOJ uses the Financial Institutions

Reform, Recovery and Enforcement Act (FIRREA) of 1989 and civil penalty provisions

to pursue prosecutions against banks (MacDonald, 2016). FIRREA provides the DOJ

with powers to seek civil financial penalties for violations of certain criminal statutes

against anyone violating any of the enumerated criminal statutes that involve or affect

financial institutions or government agencies (MacDonald, 2016). On February 9, 2012,

the DOJ announced a $25 billion settlement with five banks, the Bank of America, JP

Morgan Chase & Co, Wells Fargo & Company, Citigroup Inc., and Ally Financial Inc.

(formerly GMAC)(MacDonald, 2016).

Through their voting rights, shareholders have the formal power to influence the

governance of public companies (Norli, Ostergaard, & Schindele, 2015). Norli et al.

(2015) insisted that directors should be prosecuted more often and more aggressively than

has been done in the past, particularly when company directors or executives have

committed a grave offense. By contrast, Travers (2013) asserted that the prosecution of

directors was sufficient as it appears to be considerably more widespread than the

prosecution of individual employees. Shareholders seeking to replace existing board

members in a proxy contest must run a public campaign, hire legal expertise, and pay for

producing and distributing their slate of directors to other shareholders of the company

(Norli et al., 2015).

Shareholder activism has increased since the crisis of 2007-2009, with calls for

board member accountability (Gillian & Panasian, 2015). There has been litigation

initiated by shareholders (Brochet & Srinivasan, 2014). Since 2000, there has been a

dramatic upsurge in shareholder lawsuits against firms, executives, and board members,

with aggregate U.S. securities class action settlements increasing from $1 billion between

1996 and 1999 to $10.6 billion in 2006 (Gillian & Panasian, 2015). Brochet and

Srinivasan (2014) suggested that directors who might have stopped the fraud or played a

larger role in a securities violation, such as audit committee members, are more likely to

be targeted; those targeted are more likely to have votes withheld and lose their board

seat. The repercussions are broad and may be severe. Deng, Willis, and Xu (2014) found

that defendant firms in class action lawsuits incur higher borrowing fees and interest rates

due to, a loss of reputation of the firm. Firms subject to securities litigation have limited

investment opportunities, both in terms of capital expenditures and research and

development (Autore, Hutton, Peterson, & Smith, 2014).

Trade partnerships. Artuso and McLarney (2015) wrote that advocates of

linking labor standards and trade policy fear that increased trade and deeper integration of

globalization may continue to lead firms to move production to low-cost locations with

lower standards of safety and security. Advocating for high labor standards may reduce

wages in countries that maintain and enforce high labor standards; these same actions

may and motivate corporations and governments to weaken or remove standards to

improve the competitive advantage offered by their country (Artuso & McLarney, 2015).

Corporate governance in the United States requires that banks and corporations have

effective policies and safeguards that manage important strategic issues as board

members have fiduciary responsibility which requires them to act and protect shareholder

interests (Nordberg & McNulty, 2013).

Widely adopted lean practices and low production costs promote cost savings and

competitive advantage through outsourcing, but companies that choose to outsource must

be prepared to assume risk, both upstream and downstream throughout the supply chain

(Chakravarty, 2013). The new outsourcing model established at Boeing involved

establishing partnerships with approximately 50 Tier 1 strategic associates, which was a

positive opportunity, but was quickly followed by unexpected problems (Thorne &

Quinn, 2016). In early 2013, Boeing encountered problems with fabrication of its 787

Dreamliner that eventually resulted in the entire fleet being grounded due to inability to

effectively manage secondary suppliers (Thorne & Quinn, 2016). Good oversight of

overseas suppliers’ factory operations and strategic partners could promote the corporate

image (Hilson, 2014).

Success in overseeing collaborators’ global supply chains depends on shared

value and good corporate governance that is often at odds with the realities of power,

information asymmetry, and reward systems (Soundararajan & Brown, 2016). Poorly

matched partners can mean reliance on an overseas company whose leaders accept

continued poor working conditions (Soundararajan & Brown, 2016). Violations of

workers’ legal rights in the interest of economic efficiency is fundamentally incompatible

with the duty of multinationals to respect employees and ensure that offshore factories,

whether internal to the organization or owned by their suppliers and subcontractors, are in

full compliance with local laws (Preiss, 2014). Good governance transcends national

borders.

Connected world. There are other current and evolving corporate governance

challenges. The global population is connected. Economic ripples that began in far-off

nations have reverberated to other parts of the world, including the United States

(Mamatzakis & Bermpei, 2015). Likewise, the economic crisis that began in the United

States led to a global recession (Mamatzakis & Bermpei, 2015). Global trade alliances,

business computer applications, mobile computing, international migration, and global

supply chains have increased the pace of globalization (Artuso & McLarney, 2015).

Current trends in globalization have spurred the need to re-examine the political and

economic wisdom of alliances such as the European Union relative to regional trade

alliances such as the Trans-Pacific Partnership Agreement (2016).

Resurgence of the fair-trade movement has both influenced and counteracted trade

imbalances, outsourcing of jobs, inequality, social advocacy on the topic of consumers’

rights, as well as improvements in banking and corporate governance (Artuso &

McLarney, 2015). There is value in studying mistakes made in the past, articulating

lessons learned, and implementing mitigating strategies. Board members have a fiduciary

responsibility to act and protect the interests of shareholders and other stakeholders

(Nordberg & McNulty, 2013). Internal and external monitoring mechanisms, the

effectiveness of board independence, and CEO non duality governance mechanisms are

widely believed to resolve the agency problem and result in profitability (Misangyi &

Acharya, 2014). Consequently, board selection criteria are important to assuage the

agency problem, allowing for strategies to mature and strong corporate governance to

take root.

Board Selection Criteria

Corporate governance in the banking industry had failed many times in several

nations, and banking crises seem to be a recurrent phenomenon: 13 major financial crises

have been observed since the 1990s (Dermine, 2013). Flaws in corporate governance

systems lead to financial market scandals that in turn caused significant losses to

investors (Khemakhem & Naciri, 2015). Contingency approaches in comparative

corporate governance can help firms maintain their financial performance (Desender,

Aguilera, Crespi-Cladera, & Garcia-Cestona, 2013). There is a high premium placed on

finding competent leaders who understand new business opportunities and their risks,

have a healthy level of skepticism, and can make decisions quickly (Capriglione &

Casalino, 2014). Active boards of directors and board practices designed to achieve

longterm utility rather than short-term opportunistic advantages are central to the

prescription of agency theory to protecting owners' interests, minimize agency costs, and

ensure alignment between principals’ and agents’ interests (Conheady et al., 2015).

Lam, Zhang, and Lee (2013) analyzed whether the norms of decision makers and

behavioral factors such as managerial traits and biases can affect executives’ financing

decisions. Based on these analyses, Lam et al. concluded that the executive’s type of

leadership has an influence on fiscal policy, finance posture, and governance in any

institution. There is increasing economic interdependence of countries around the world.

The movement of capital across borders has been liberalized. Financial

information is transmitted almost instantly (Valentina & Ivan, 2013). Global markets and

financial centers are connected without interruption, 24 hours a day (Valentina & Ivan,

2013). As a result of these trends in interconnectedness, the global financial system has

become volatile (Valentina & Ivan, 2013). These trends increase the need for a vigilant

board and a focus on iterative risk analysis and mitigation (Capriglione & Casalino,

2014). There is the need for strategic agility, which is the ability of executives and boards

of directors of companies to adapt to changes in the business environment and to

influence that environment (Mavengere, 2013).

The agency view of corporate governance demands sufficient monitoring to align

agency interests with those of the principal (Fama & Jensen, 1983). This alignment

represents a reactive answer and in some cases, an innovative incentive contract that is

contingent upon performance (Hoeppner & Kirchner, 2016). Such a contract

comprehensively governs the relationship between agency and principal interests,

reducing the moral hazard problem (Hoeppner & Kirchner, 2016). This type of contract

requires an effective board (Hoeppner & Kirchner, 2016). Corporate governance in banks

involves the practices of boards of directors and senior management who must

collaborate to set corporate objectives and provide strategic direction for responsible

decision making, accountability to shareholders, compliance with applicable laws,

protection of depositors, and consideration for stakeholders (Leventis et al., 2013).

Effective corporate governance is imperative for executives and boards in the banking

industry to thwart and manage potential crisis and deter unethical business practices

(Leventis et al., 2013).

There is considerable variability in the director nomination process. Some

organizations follow formal, structured approaches, while others are relatively informal

and organic (Clune, Hermanson, Tompkins, & Ye, 2014). In most banks in the United

States, the nominating committee of the board usually identifies and nominates

individuals for board service (Clune et al., 2014). External search firms and a matrix/grid

approach for assessing director skill sets across the board are parts of the selection

process (Clune et al., 2014). Nohel et al. (2014) found that companies that hold board

elections every 3 years went from about 60% of S&P 500 companies in 2001 to well

under 20% in 2014. The market perceived this change in election frequency as a positive

one, indicating that investors preferred well-governed corporations with boards that are

accountable to shareholders (Nohel et al., 2014). The goal of the nominating committee is

to enhance the ability of the board to function effectively (Clune et al., 2014).

Business Roundtable (2012) is an organization of CEOs of U.S. companies.

Nearly 20% of the total value of the U.S. stock market is represented in the Business

Roundtable. Members of the association function broadly on boards of directors.

According to members of the association, boards of directors serve with an expectation

by shareholders and other constituencies of vigorous and diligent oversight of corporate

affairs in:

•selecting and evaluating the position of CEO;

•planning for senior management development and succession;

•reviewing, understanding and monitoring the implementation of the

corporation's strategic plans;

•reviewing and understanding the corporation's risk assessment and overseeing

the corporation's risk management processes;

•reviewing, understanding and overseeing annual operating plans and budgets;

•focusing on the integrity and clarity of the corporation's financial statements

and reporting;

•advising management on significant issues facing the corporation;

•reviewing and approving significant corporate actions;

•reviewing management's plans for business resiliency;

•nominating directors and committee members and overseeing effective

corporate governance; and

•overseeing legal and ethical compliance.

The skills and background of the executive and board members are intended to

promote governance while also guiding investments in research, development, and

innovation (Yuan, Guo, & Fang, 2014). These actions translate into superior corporate

financial performance (Yuan et al., 2014). The composition of a board is crucial to

effectiveness of the board and its ability to supervise the CEO (Sur et al., 2013).

Academic institutions remain a source of knowledge (Starbuck, 2014). As purportedly

commercially and politically neutral institutions that emphasize open, fact-based

discussion, members of universities can enhance the quality of governance by senior

executives as well as outside stakeholders (Starbuck, 2014). In essence, governance best

practices and effective governance are value-enhancing strategies (Conheady et al.,

2015).

Board member selection criteria continue to include knowledge and experience

(Elms et al., 2015). Elms et al. (2015) reported candidates should have an existing

knowledge of how boards operate and possess role-fit skills that complemented those of

current directors. Viable candidates for boards of directors should also be a good group fit

and be socially compatible with the existing directors (Bezemer, Nicholson, & Pugliese,

2014). Being a good group fit is essential because board members need to interact and

work together as a team (Bezemer et al., 2014).

Other factors that are important to board governance include term limits and

education that encourages board members’ appreciation of the value of diversity in the

debate (Carver, 2013). Kakabadse et al. (2015) questioned whether functional diversity

(e.g., education, technical abilities, and functional background) and non regulated aspects

of diversity (e.g., socioeconomic background, personality characteristics, or values) affect

board effectiveness. A. N. Berger, Kick, and Schaeck (2014) investigated how

demographic features of the board, such as age, gender, and educational composition,

affect corporate governance in banking. A. N. Berger et al. found that having younger

members on the board increased portfolio risk and, to a lesser extent, having a higher

proportion of female executives also increased portfolio risk, while having board

members with doctoral degrees reduced portfolio risk.

Zhu, Wei, and Hillman (2014) highlighted the importance of demographic

characteristics of appointed directors (e.g., age, education, background, and gender), but

failed to explain whether these attributes were the reason for selection of that individual

or whether other social and political influences played a contributing role. Other board

member attributes include status and prestige, which help to reduce uncertainty and signal

legitimacy to investors (Acharya & Pollock, 2012). An opposing view is that the more

politically affiliated trustees on the board, the greater the affinity for risk-taking behavior

and risk shifting, which is the tendency to make more daring decisions when in groups

than when acting alone (Bradley, Pantzalis, & Yuan, 2016).

Terjesen, Aguilera, and Lorenz (2015) asserted that gender quota legislation,

which forces firms to respond quickly to identify, develop, promote, and retain suitable

female talent for corporate board leadership structure, has a strong and positive impact on

the strategic direction of publicly traded and state-owned enterprises. Gender difference is

usually a decisive factor for board performance and overall or aggregate financial

performance in the capital markets (Chapple & Humphrey, 2014). In many industries,

gender diversity is positively correlated with performance (Chapple & Humphrey, 2014).

Female directors enhance the instrumental, relational, and moral legitimacy of the board,

thus increasing perceptions of the ability, benevolence, and integrity of the board, all of

which are pivotal to fostering shareholder trust (Perrault, 2015). Some scholars argued

that gender-diverse boards are tougher monitors of CEOs; and although gender-diverse

boards are usually considered a positive characteristic, they may harm well-governed

firms where additional monitoring is counterproductive (Mateos de Cabo, Gimeno, &

Nieto, 2012).

A. N. Berger et al. (2014) documented a negative relationship between an increase

in the number of female board directors and bank risk resulting from less experience in

dealing with high risks compared to male board members. Another perspective is that the

presence of a small number of women on the board has an insignificant effect on board

performance, and if women are a minority in the boardroom, they are less likely to

challenge their male counterparts (Kakabadse et al., 2015). Sun, Zhu, and Ye (2015)

espoused a more prevalent view, arguing that equalizing the board variable of gender

diversity could influence strategic decision making and have a positive impact on

corporate financial performance. Kakabadse et al. (2015) concluded that gender diversity

enhances boardroom discussions, creativity, and allows for different perspectives;

thereby, reducing the likelihood of uncritical groupthink.

In general, board diversity fosters openness, resolution of conflicts, integration of

different perspectives, and allows for an environment in which better decisions are made

(Sun et al., 2015). The board of directors not only advises and monitors the CEO’s

activities, but also makes strategic decisions (Mathew, Ibrahim, & Archbold, 2016).

Mathew et al. (2016) asserted that the ability of board members to provide valuable input

and challenge decisions depends on the board composition and its attributes. Diversity is

important toward board performance (Zhu et al., 2014). Walker, Machold, and Ahmed

(2015), investigated whether personality trait diversity in conjunction with demographic

diversity explained the differences in cognitive conflict and affective conflict in boards,

found no direct relationship. Walker et al. concluded it is important for the director

nomination process to encourage the selection of directors with varied demographic

attributes to enhance board dynamics.

The banking industry, which was held accountable for the credit crunch that began

in the United States in 2008 and spread globally, is important to the U.S. economy: it

captured more than half (58%) of the global investment banking revenues in 2012

(Mamatzakis & Bermpei, 2015). Gilles (2016) cautioned that the global economic crisis

that began as a banking system crisis pointed to a pattern of instability and possible future

financial crises due to sovereign debt, growing inequality, and globalization.

Ramachandran, Ngete, Subramaninan, and Sambasivan (2015) stated that globalization

and multinationalization of businesses had increased the need for best practices in

corporate governance. Gilles warned that the United States is on the precipice of another

financial crisis unless bank governance is strengthened. The next looming financial crisis

involves the student loan/debt bubble (Mueller, 2015). Student loans are the second

highest category of consumer debt in the United States and account for $1.2 trillion of

debt, the result of the average 4-year private university tuition having increased from

$10,273 in 1974 to $31,231 in 2014 (Mueller, 2015).

During the economic crisis that began in 2008, the U.S. government bailed out

some banks that were deemed too big to fail (Barth & Wihlborg, 2016). The notion of

being too big to fail is a reference to banks that are perceived as generating unacceptable

risk to the banking system and indirectly to the economy as a whole; if these banks were

to default, they would be unable to fulfill their obligations and would trigger a collapse in

the economy (Barth & Wihlborg, 2016). Investors believe assurances made by the federal

government to not bail out large firms in the future is a hollow promise because of past

precedents and the potential damage to the economy (Gromley, Johnson, & Changyong,

2015). As of 2016, some banks may still be too big to fail. Roe (2014) asserted that many

investors believe there is the high likelihood that big banks will be bailed out again if

another crisis comes to fruition.

Size, the number of subsidiaries, and extent of involvement in market-based

activities increased systemic risk (Laeven, Ratnovski, & Tong, 2014). Controls instituted

through corporate governance help to keep firms competitive and efficient, but these

controls deteriorate in too-big-to-fail financial firms (Roe, 2014). Roe (2014) argued that

these controls impede shareholders, the board of directors, and the CEO from

restructuring the firm, even if such a restructuring would be operationally wise. Board

composition and board selection criteria are critical to ensuring effective corporate

governance (Kumar & Singh, 2013).

The answer to the question of what constitutes effective corporate governance

continues to evolve. Cook and Glass (2015) concluded that diverse boards rather than

mere tokenism are positively associated with effective corporate governance practices

and product development; diverse boards are paramount for achieving corporate benefits.

Effective corporate governance is based on internal and external environments and

ensures the optimal use of resources, maximization of corporate performance, and

minimization of risk, all while protecting the interests of investors and stakeholders

(Fülöp, 2013). Corporate governance is the purview of the CEO and board members

(Nordberg & McNulty, 2013). Effective corporate governance is incumbent upon control

of the board over financial reporting (Fülöp, 2013). Credit risk, the risk of loss due to

debtors’ nonpayment of the principal or interest on a loan or a particular line of credit,

has resulted from poor governance practices (Switzer & Wang, 2013).

Some propositions for board modifications have recommended professional

boards consisting of retired executives with industry-specific expertise (Hemphill &

Laurence, 2014). While Hemphill and Laurence (2014) advocated for a professional

board, Carver (2013) argued that retired executives are vulnerable to groupthink because

they share similar perspectives and lack creativity. Zeitoun et al. (2014) along with

Carver, contended that a professional board is a poor substitute for an advisory system

entirely under CEO control. Lack of full vision, clarity, and creativity are traits of

groupthink (Carver, 2013). There is no full vision without a wide variety of perspectives,

there is no clarity without a willingness to dig into issues, and there is no creativity

without diverse perspectives (Carver, 2013).

The number of hours that independent directors spend on board-related activities

(and commensurate compensation received) should be considered as potential

valueadding corporate governance improvements (Hemphill & Laurence, 2014).

Allocating more power to the board of directors is the best strategy for corporations

because the meetings are easier to convene, cost less to the corporation when board

members are more specialized, and specialized board members are knowledgeable about

the situation and business of the company (Cools, 2014). Ylinen (2013) concluded that

stable, prosperous banks and good development outcomes contribute to national

prosperity, improved welfare, and better standards of living for employees, local

businesses, and shareholders.

Board members have a fiduciary duty—a legal obligation of loyalty—to represent

shareholders and maximize shareholder return (Nordberg & McNulty, 2013). Fiduciary

duty is meant to ensure there is a reduced risk of valuable information being disclosed to

others and that directors are strong advocates of stakeholder interests (Kim & Ozdemir,

2014). Board monitoring of the CEO is more easily achieved when the board has the

expertise to process the information and render informed decisions (Tian, 2014). To this

end, board members must be capable, knowledgeable, and willing to perform their duties

(Tian, 2014). Board variables such as experience, education, part-time and full-time

member status, attendance at meetings, age, the dual role of CEO and board chair,

independence, and diversity are all important (Baulkaran, 2014; Hemphill & Laurence,

2014; Krause et al., 2014; Lin et al., 2014; Nohel et al., 2014).

This review of professional and academic literature addressed the topics of agency

theory, other governance theories, history of the corporate governance problem,

governance initiatives and strategies, current corporate governance challenges, and board

selection criteria. Corporate and bank governance continues to be a topic of great interest

to scholars and economists. Board composition is among the most important factors in

ensuring effective governance; as such, director selection criteria merit the focus of study.

The appropriate research question for this study is, what board selection criteria do

banking leaders use to ensure effective governance?

Agency theory was the appropriate framework to explore effective governance

using a qualitative case study method and design with open-ended interview questions.

External governance is important but relies on a strong internal governance system.

Determining the board selection criteria that ensure effective governance could lead to

better business strategies and increased financial prosperity for all stakeholders. Given the

possibility of the occurrence of future financial crises, director selection criteria are an

important area of research for professionals and academics.

Transition

Section 1 included a discussion of the business problem that CEOs and boards

lack director qualification criteria to create effective strategies for strong corporate

governance. I also discussed the foundation of the study, the background of the corporate

governance problem, and the nature of the study. The research question aligns with the

specific business problem and the interview questions.

The conceptual framework applies to the principles of corporate governance and

strategic management. In Section 2, I will address the role of the researcher, participant

selection strategy, research method and design, population and sampling method,

research ethics, data collection instruments, data analysis, reliability, and validity. The

findings of the study will be presented in Section 3. The application of the research to

professional practice, implications for social change, and recommendations for further

research will also be included in Section 3.

Section 2: The Project

Section 2 will contain a discussion of the research method and design I selected

for this study. I will also provide a description of my role as the researcher relative to

studying the literature, obtaining the perception of participants, and analyzing the

responses. In addition, also included in this section will be discussions of the population,

the role of ethics, the data collection instrument and technique, data analysis, and

reliability and validity. In this study, I obtained and analyzed the perceptions of business

leaders in a California bank. This study was designed to provide insights into optimal

board selection criteria and effective corporate governance strategies.

Purpose Statement

The purpose of this qualitative single case study was to explore strategies to

improve board selection criteria that banking leaders use to promote effective

governance. The targeted population comprised of banking leaders in one California bank

who demonstrated governance procedures for selecting board members and effective

governance that ensured that the bank did not experience failures or government bailouts

during the last financial crisis (2007–2009). The findings of this doctoral study have

implications for positive social change, including economic and social benefits through

profitable corporations to stakeholders, communities, and the economy as a whole. The

social benefits may include enhancing self-worth when individuals remain employed in

solvent corporations and promoting stable thriving families and communities.

Role of the Researcher

Prior to data collection, my role as the researcher in this qualitative study was to

plan the research, select the appropriate design, conduct the literature review, and

understand and identify the gaps in the literature. Academic integrity requires an

acknowledgment of existing literature (Luce, McGill, & Peracchio, 2012). My role during

the data collection was to conduct semistructured interviews with participants in face-to-

face settings, via Internet chat sessions, or by telephone.

In my current professional and personal roles, I had no relationship to the topic or

firms on which this study was focused. I conducted this study in full compliance with

ethical principles, such as those provided in the Belmont Report (see Mikesell, Bromley,

& Khodyakov, 2013), to protect the rights and well-being of the research participants. I

completed the National Institute of Health web-based training course on “Protecting

Human Research Participants” on November 09, 2014 with Certificate Number 1614488.

In this study, I respected participants according to the precepts of the Belmont Report. As

part of protecting the rights of potential participants and actual participants, I provided

them with sufficient information about the study and allowed them to make an

independent decision about whether to participate (see Mikesell et al., 2013). Strategies I

used to mitigate bias during data collection included asking questions that were not meant

to elicit a particular answer, not asking questions that prevented the participant from

freely articulating his or her own perceptions, and not driving participants to

predetermined conclusions (see Boatright, 2013).

The purpose of research is to determine the truth (Boatright, 2013), and it is

important to be ethical in all phases and practices to have a credible study. In terms of

situational biases, I would be remiss if I did not clarify the impact of the largest economic

recession since the Great Depression on me. Likewise, I acknowledge my worldview is

that some individuals with fiduciary responsibility did not perform their duties to the

fullest extent. Recognizing this bias from the outset enabled me to prepare to undertake

research while removing my bias. My clarification of these biases lends authenticity to

my study.

It is important for the researcher to be cognizant of reflexivity, which is the active

acknowledgement by the researcher that his or her own actions and decisions will

inevitably have an impact on the meaning and context of the experience under

investigation (Rodham, Fox, & Doran, 2015). When undertaking the research work, I

bracketed my feelings about the issues; utilized my ability to develop and maintain a

stance of curiosity toward the data; and engaged in reflexivity to self-monitor the impact

of my biases, beliefs, and personal experiences relative to the research (see Berger, 2013).

I provided an informed consent form to all participants before initiating data collection

through interviews.

A qualitative research interview involves gathering information and facts, eliciting

stories, and learning about experiences (Rossetto, 2014). The semistructured interview

protocol is commonly used in case study research (Yin, 2014). A researcher uses an

interview protocol to set expectations, uses an interview log, and determines an

appropriate location (Jacob & Furgerson, 2012). This form of interviewing resembles the

guided interview rather than a process of structured queries; in conducting semistructured

interviews, the interviewer poses a stream of questions in a fluid or unstructured manner

(Yin, 2014). I followed some suggestions from literature (Rossetto, 2014; Jacob &

Furgerson, 2012; Yin, 2014) by gathering information, utilizing an interview protocol and

asking the participant’s interview questions and some follow-up questions. The

semistructured interview was ideal for exploring participants’ overall perceptions

regarding utilizing corporate governance in strategy formulation and execution as it

enables follow-up questions.

Participants

Board characteristics play an important role in organizations by improving the

corporate governance of the organization (Hassan, Marimuthu, & Kaur Johl, 2015). In

this study, the participants represented various positions on board membership, selection

committees, and executive leadership. The eligibility criteria for the study participants

were knowledge about the selection criteria necessary for board membership and

successful governance of the bank. Other eligibility criteria for the study participants

included board members, selection committee members of the bank, and bank leadership

who had been associated with the bank for at least 3 years at the time of the study. Board

characteristics are key determinants of several corporate decisions (Iqbal et al., 2015).

Consequently, for good governance, banks and companies need a mix of female and male

directors who possess the appropriate competencies (i.e., knowledge, skills, and

experience) to contribute to board decision making (Elms et al., 2015).

I began this study by obtaining permission from the Walden University

Institutional Review Board (IRB) to conduct this research. Upon obtaining permission

from the IRB, I contacted executives of the target bank by mail and by visiting the bank

to obtain assistance in contacting members of the board of directors. I initiated contact

with the potential participants through surface mail, e-mail, and with telephone calls until

I received a response. My strategy for gaining access to participants was through an

initial contact to invite business leaders to participate in the study. The next recruitment

step was sending consent letters by regular mail to each participant and establishing

interview dates and times. Ultimately, I interviewed them over the phone.

Technology has transformed the interviewing process, enabling researchers to

reduce costs and increase the reach of data collection via telephones (Lord, Bolton,

Fleming, & Anderson, 2016). In developing a working relationship with the leaders who

accepted my invitation to participate in the study, I explained the nature and objectives of

the research, obtained informed consent, coordinated schedule availability for the

interview, and provided updates on the progress of my research. Interviews are often used

in qualitative research, and semistructured interviews are appropriate as they enable

follow-up questions and often produce comprehensive responses (Dresch et al., 2015).

I used open ended questions to interview the participants. The use of open-ended

questions would be best for obtaining comprehensive responses from participants (Starr,

2014). To establishing a working relationship, I engaged in rapport with the participants,

conducted the interviews, provided my contact information, and Walden University’s

contact information with approval information for the study. Interviewing is a data

collection method often used in combination with other methods to develop a better

account of the empirical phenomenon (McNulty, Zattoni, & Douglas, 2013).

Research Method and Design

The researcher typically chooses from three categories of research methods

commonly used in a doctoral study: quantitative, qualitative, and mixed methods (Yin,

2014). The qualitative researcher is focused on applied and theoretical findings or

discoveries, based on research questions through field study in natural conditions (Park &

Park, 2016). Quantitative researchers rely on the testing of hypotheses to achieve the

research goals in controlled and contrived studies (Park & Park, 2016). Mixed methods

research combines quantitative and qualitative methods in the same study (Venkatesh,

Brown, & Bala, 2013). The research question, constraints, and type of participants are

important determinants of the appropriate methodological and design choice (Malsch &

Salterio, 2016).

Research Method

A research method is a guide for researchers to follow in the search for necessary

answers to the research problem (Saunders, Lewis, & Thornhill, 2012). To study this

business problem of agency conflict and corporate governance, I used the qualitative

research method, which is a holistic research approach that allows the researcher to

synthesize data from multiple perspectives and extend that synthesis to create knowledge

and leverage that knowledge in creative ways (see Singh, 2015). Through my study, I

explored board selection criteria and strategies that ensure effective governance. The

defining characteristics of qualitative research are (a) data collection in the natural field

setting, (b) the researcher as key to data collection, (c) multiple sources of data, (d) focus

on the meanings of participants’ responses, and (e) interpretive inquiry and holistic

account (McNulty, Zattoni et al., 2013). The qualitative research method is best for

exploring the perceptions of participants (Starr, 2014).

Bettis, Gambardella, Helfat, and Mitchell (2014) wrote that the quantitative

method allows for the study of a sample and the generalization of findings from that

sample to the population through statistical analysis. This method could be used to collect

and analyze data that represent trends, historical numbers, and allow for the comparison

of variables (Frels & Onwuegbuzie, 2013). Bhattacherjee (2012) pointed out that the

quantitative method is the most appropriate research technique to determine if a

relationship exists between variables. The quantitative method is a rigorous research

approach, appropriate for testing hypotheses about the relationship between a studies'

independent and dependent variables (Bettis et al., 2014). The quantitative method was

not appropriate for this study as I did not test a hypothesis or compare variables.

A mixed methods approach was not appropriate for this study as this approach is a

preferred method when neither the qualitative nor the quantitative method alone could

sufficiently answer the research question (Venkatesh et al., 2013). A chief aim of my

study was to explore board selection criteria that promote effective governance. The

research question and purpose statement are important factors in the choice of the

research methodology from among quantitative, qualitative, or mixed methods. The

qualitative method was best for gathering experiences and obtaining comprehensive

responses (see Dresch et al., 2015).

Research Design

In this study, I used a case study design to determine and propose board selection

criteria that contribute toward effective governance. A case study design should be

considered (a) to answer how and why questions, (b) to cover contextual conditions, (c)

when a researcher cannot manipulate participants’ behavior, or (d) when the boundaries

are not clear between phenomenon and context (Yin, 2014). The main objectives of the

case design are to explore, describe, and explain (Dresch et al., 2015).

In this study, I chose to undertake a single case study, which was critical to my

conceptual theory and used to determine whether the propositions are correct or whether

an alternative set of explanations might be more relevant (see Yin, 2014). The rationale

for undertaking a single case study includes an extreme or an unusual case and the

revelatory case (Yin, 2014). A single case can contribute to knowledge and theory

building by confirming, challenging, or extending the theory (Yin, 2014). A single case is

ideal in management research when revelatory or exemplary data are sought or when the

study offers opportunities for unusual research access (Mariotto, Pinto Zanni, & De

Moraes, 2014). A single case study is also ideal in a revelatory case that can contribute to

knowledge (Yin, 2014). A single case could also help to determine whether an alternative

set of explanations might be more relevant (Yin, 2014).

I had several other qualitative design options. The phenomenological approach is

used to study the way a person lives, creates, and relates in the world (Conklin, 2013).

Phenomenology can be employed to understand shared human experience because the

design focuses on the participants’ experiences and meaning (Conklin, 2013). On the

other hand, ethnographic designs are appropriate for studying a group in which members

share a culture (Hampshire, 2014). Neither phenomenological nor ethnographical designs

were appropriate for studying board selection criteria that promote effective governance.

A phenomenological design was not appropriate as the purpose of this study was not to

explore the way people live or share their lived experiences. Ethnographical design was

not an appropriate design as in this study, I did not focus on a group in which members

share a culture.

A key to conducting a case study is reaching data saturation. Data saturation is

said to occur when no new data are obtained from additional interviews (Houghton,

Casey, Shaw, & Murphy, 2013). The number of interviews that should be conducted is

not as important as achieving data saturation (Fusch & Ness, 2015). The objective of the

interview process is not about the numbers per se, but about rich (quality) and thick

(quantity) data, structuring interview questions to ensure the researcher asks multiple

participants the same questions, and interviewing the people that one would not normally

consider (Fusch & Ness, 2015).

Population and Sampling

The population was comprised of 10 leaders at a single bank in California, eight

board members, the executive vice president, and chief information officer. The financial

crisis of 2007–2009 engulfed the banking system of the United States before spreading

around the world (Bordo, Redish, & Rockoff, 2015). Few banks escaped adverse

outcomes and financial loss resulting from the 2007–2009 financial crisis (Paulet et al.,

2015). A single case and focus on a single bank sufficed to highlight the selection criteria

for board membership and the governance strategies that may be emulated by others.

I interviewed four business leaders from the bank to achieve data saturation. The

interviewees were current board members and executive vice presidents. The owners of

banking institutions appoint board members to provide high-level oversight within the

organization (Capriglione & Casalino, 2014). A case study interview requires the

researcher to operate on two levels at the same time: satisfying the needs of the line of

inquiry and simultaneously putting forth friendly and nonthreatening questions in the

open-ended interview (Yin, 2014).

The four business leaders with knowledge of the bank’s selection criteria were

chosen through purposeful sampling. The participants in this study have at least 3 years’

association with the bank. Purposeful sampling method could be used to select

participants likely to provide relevant information (Palinkas et al., 2013). Purposeful

sampling is based upon meeting inclusion criteria such as required knowledge and

information in which elements are selected from the target population on the basis of their

fit with the purpose of the study (Robinson, 2014). For this study, I used confirming and

disconfirming purposeful sampling to confirm the importance and meaning of possible

patterns and check out the viability of emergent findings with new data (Palinkas et al.,

2013) was appropriate. Conducting purposeful sampling of business leaders allowed me

to interview individuals who have knowledge on the selection criteria for board members

that promote effective governance. It is important to focus on interviewing individuals

who have the authority or the knowledge to offer useful insights and comments on the

research topic (Rowley, 2012). The population selected aligns with the overarching

research question.

Ethical Research

The study of a contemporary phenomenon in its real-world context obligates a

researcher to important ethical practices akin to those followed in medical research (Yin,

2014). Informed consent is a key element for protecting the welfare of research

participants, as established by the Nuremberg Code; in addition, the Helsinki Declaration

underscored the importance of having an ethics committee review a research proposal,

which includes an informed consent form (Kumar & Singh, 2013). The informed consent

form contains Walden University’s approval number 03-23-17-0465001 for this doctoral

study. Consent to participate in research was an important component of conducting an

ethical research study that involves human participants (Braunack-Mayer et al., 2015).

The informed consent process included providing information in written form and

explaining the form. Participants were required to sign an informed consent form prior to

interviewing them (see Appendix B). The informed consent form contains Walden

University’s approval number for this doctoral study.

The form includes the purpose of the research and the proposed process, as well as

the methods the researcher will use to maintain privacy. Participants in a study must be

assured of privacy and confidentiality (Dekking, van der Graaf, & van Delden, 2014). I

assured participants that the information being sought was for research purpose only and

ensured their anonymity by labeling participants as P1 through P4. A researcher is

responsible for conducting a case study with special care and sensitivity (Yin, 2014). The

interviews did not include the individual participants’ or the bank name and will be used

only for the doctoral research study. The informed consent form also explained the

expectations of participation, the withdrawal process, ethical principles that I followed,

and an affirmation of the individual’s rights to understand a study before agreeing to

participate (Knepp, 2014). An informed consent form must emphasize the voluntary

nature of participation (Dekking et al., 2014). I provided each participant a copy of the

informed consent form. The informed consent agreement used for this study and

interview records are in a locked filing cabinet to which only I would have access for 5

years.

As part of the informed consent process, I explained to potential participants that

they may withdraw from the study at any time of their choosing. The National Institute of

Health issues a certificate upon completion of a course for conducting studies involving

the collection of sensitive information. I completed this course of study. This course of

study explains that no incentives should be offered to participants. I did not offer any

incentives for participating in this study. I took all necessary measures to ensure adequate

ethical protection of participants.

A researcher must be ethical in all practices (Boatright, 2013). I sought

clarification and explored data objectively, remembering that a primary purpose of

undertaking research is to find the truth. Interviews should be free of prejudices and

presuppositions (Tosey, Lawley, & Meese, 2014). Ethical practices include taking care

when identifying themes to ensure that each theme is actually represented in the

transcripts being analyzed and not a product of the researcher’s misinterpretation

(Rodham et al., 2015). I followed ethical practices throughout the process of conducting

the research, ensuring the undertaking is completed without allowing my worldview to

influence or temper my assumptions.

I maintained all data on a password-protected external drive to which only I have

access. These data will be maintained for 5 years to protect confidential information,

including the identity of participants. After 5 years, I will shred the documents and

destroy the external drive containing research data. The final doctoral manuscript

includes the Walden IRB approval number. I ensured that the document does not include

names or any other identifiable information of individuals or organizations.

Data Collection Instruments

I was the primary collection instrument in this study. A researcher undertaking a

qualitative case study is the primary data collection instrument (Turner & Norwood,

2013). Case study evidence includes archival records and interviews (Yin, 2014). Silic

and Back (2013) utilized open-ended questions within semistructured interviews to

explore perceptions on governance. According to Yin (2014), semistructured interviews

and company document analysis are common sources of evidence in case studies.

Semistructured interviews are an appropriate way for the researcher to focus on the

details that address the research question (Rubin & Rubin, 2012). I employed a single

case study design and conducted semistructured interviews to explore board selection

criteria that promote corporate governance from the perspective of business leaders in a

single bank in California.

Participants offered answers to a series of preliminary questions. The interviews

began with my introducing myself and stating the purpose of the research; I asked

permission to record the interview and assure the participant of confidentiality. The

participants declined to permit the recording of the interviews. Documentation is a key

aspect of data collection (Yin, 2014). I documented the responses from the interviews in a

Microsoft Word document that is easy for storage and retrieval.

I also collected secondary data for this study. Secondary data could support other

significant findings in a study (Hensmans, 2015). Secondary data collection included an

examination of publicly available archival documents with financial reports and business

journals. These data, such as board membership and company annual financial

information, was collected from the bank website, the EDGAR database (an online

resource maintained by the SEC), and data from the Hoover’s database maintained by

Dun & Bradstreet. Secondary data could proffer adequate data required for undertaking

rigorous research, even though it may exist for other purposes. Kaufman and Hwang

(2015) triangulated their study’s data with secondary data to collaborate the open-ended

interview responses in their case study on two French banks operating in the United

States. Brown (2015) collected secondary data in his qualitative case study of financial

crimes to support interview responses.

Member checking is a technique to validate the researcher’s interpretation of the

interview data collected; the process enhances the academic rigor of the study and allows

for additional data to be collected in the form of corrections or modifications to the data

previously collected during the interview (Harvey, 2015). Member checking is when a

researcher shares the interpretation of the participant’s responses with the participants to

confirm that it represents their answer and validates the findings (Tong, Chapman, Israni,

Gordon, & Craig, 2013). I conducted member checking to enhance the reliability of the

interview responses and triangulate the interview results with information available

through publicly available company archival documents.

Member checking helped to confirm participants intended responses and validate

my interpretation. A researcher may triangulate by using multiple sources of data to

enhance the reliability of their study (Trangkanont & Charoenngam, 2014). I used (a)

semistructured interviews with open-ended questions, (b) bank archival documents, (c)

financial reports, (d) business journals and (e) methodological triangulation to enhance

the reliability and validity of my research.

Data Collection Technique

My data sources are semistructured interviews with open-ended questions, bank

archival documents, financial reports, and business journals. Semistructured interviews

are used by researchers to pose additional follow-up questions to delve more deeply into

participants’ experiences and knowledge (Dresch et al., 2015). Secondary data such as

bank archival documents, financial reports, and business journals are useful for validation

(Venkatesh et al., 2013).

Primary methods for data collection in case studies are semistructured and

unstructured interviews (Yin, 2014). In conducting semistructured interviews, the

researcher poses open-ended questions and, if necessary, asks additional probing

questions to gain deeper insight into participants’ knowledge and experience (Dresch et

al., 2015). Semistructured interviewing is appropriate for gathering comprehensive

responses (Rubin & Rubin, 2012). I followed Rowley’s (2012) protocol and process,

which included the design and planning of the interview process that I used for

conducting the interviews. According to Rowley, the researcher’s initial contact with

potential participants is important. The quality of the initial e-mail message, telephone

call, or letter is key to study success.

Jacob and Furgerson (2012) advocated that first-time qualitative researchers use

an interview protocol to assist them in collecting data. I followed the steps Jacob and

Furgerson recommended, arranging interviews in an ideal location or medium, being

willing to make instant revisions to the interview protocol, and keeping the interview

within reasonable time limits. The researcher must be clear as to the amount of time that

the interview will take, capture the interest of the interviewee, and follow-up if the initial

contact does not provoke a response (Rowley, 2012).

Face-to-face interviews allow a researcher to obtain both verbal and nonverbal

cues (Rowley, 2012). Disadvantages of interviewing include the time required to travel to

conduct multiple interviews, the cost, and the difficulty of discussing sensitive topics

when face-to-face (Lord et al., 2016). If a researcher has difficulty obtaining agreement

from potential interviewees to meet for face-to-face interviews, the researcher should

consider telephone, Skype, or even e-mail interviews (Rowley, 2012). The anonymity of

telephone interviews may be more conducive for discussing sensitive issues than face-

toface interactions (Lord et al., 2016). I took extensive notes during the interviews and

read the responses back to the participants to validate the interview and mailed the

interview notes to each participant to complete member checking.

Secondary data in the form of publicly available company documents was also

collected as part of this study. Secondary data are important for corroboration and

triangulation in a research study (Hensmans, 2015). Secondary data could be used to

confirm and disconfirm data and information (Hensmans, 2015). Qualitative secondary

data entail the use of existing data to develop new scientific understanding (Irwin, 2013).

The disadvantages of using secondary data are that the data may not be an accurate

portrayal of existing information (Irwin, 2013). I utilized reliable secondary data derived

from public available sources: data from the website of the bank, document analysis, and

archival records of past performance. I triangulated secondary data with participant

interviews to corroborate participants’ responses. Robeson and O'Connor (2013) used

secondary data to determine the effect of governance board on firms' performance

through innovation.

Once collected, data were coded and analyzed with qualitative data analysis

software. I explored key themes from interview responses and related those themes to

information from the literature review regarding corporate governance. I used

methodological triangulation to explore whether the documentation supports the findings

from the interviews. Finally, I determined how the themes relate to the conceptual

framework of the study. Researchers using case study design could use methodological

triangulation to perceive all the facets of the data, extrapolate the meaning inherent in the

data and to compare and analyze the same empirical events (Denzin, 2012).

Data Organization Technique

I did not record the interviews due to the participants taking exception to being

recorded. I took detailed notes in Microsoft Word documents during the calls. Secondary

data in this study included publicly available data such as company financial statements,

governance documents from the website of the bank, data from the EDGAR database,

and data from the Hoover’s database. Using computers for qualitative data analysis, also

known as computer-assisted qualitative data analysis, has many advantages, including

identifying relevant quotations on the computer screen and coding using virtual-colored

stripes (Odena, 2013).

I utilized qualitative data analysis software application to identify the themes,

facilitate coding, and to analyze data. Qualitative software can help the researcher to

develop and renegotiate insights from theory and interview data, as well as enhance

trustworthiness, transparency, and publication potential (Sinkovics & Alfoldi, 2012).

Data for each analysis are kept safe but accessible to enable retrieval, along with other

data and documents in workbooks that will be stored on a password-protected external

drive. When not in use, the external drive will be kept in a locked filing cabinet to which

only I would have access. The external drive will be kept for 5 years following the

completion of this study, after which it will be destroyed.

Data Analysis

Data analysis included methodological triangulation. Methodological triangulation

involves using more than one kind of data to study a phenomenon, comparing multiple

data sources to confirm and make findings credible (Fusch & Ness, 2015; Houghton et

al., 2013). Hoque, Covaleski, and Gooneratne (2013) defined triangulation as the usage of

data from different sources in the study of the same phenomenon; triangulation is

important for credibility and validation. These data were collected and analyzed to allow

for data triangulation. I achieved data saturation by using different sources of

information: semistructured interviews with open-ended questions, bank archival

documents, financial reports, and business journals. I used Yin’s (2014) data analysis

approach: (a) compiling, (b) disassembling, (c) reassembling, (d) interpreting the

meaning and (e) drawing conclusions from the data.

Compiling

Compiling data is the documentation and organization of the data (Yin, 2014).

The primary research question for this qualitative research study was: What board

selection criteria do banking leaders use to ensure effective governance? Effective

governance structures are essential to achieving and maintaining public trust and

confidence in the banking system, as well as ensuring the proper functioning of the

banking sector and the economy as a whole (Leventis et al., 2013).

To answer the research question, I interviewed four business leaders affiliated

with a single bank in California. I compiled data through semistructured interviews and

open-ended questions. Another source of data for this study was secondary data using

information available through publicly available company archival documents.

Disassembling

Disassembling data is grouping data elements into labels (Yin, 2014). I read the

interview responses and looked for recurring words and phrases then formed categories

which were relevant to the research questions. I coded the concepts and ideas from the

interviews and secondary data after member checking, then critically analyzed the data

using qualitative data analysis software. Researchers use tags and labels to highlight

different segments of relevant text (Dasgupta, 2015). The logical and sequential process

for the data analysis upon completion of data collection is the transcription, coding with

qualitative software application to identify the themes, and data analysis (Odena, 2013).

There is software specifically designed to analyze qualitative text (Sinkovics &

Alfoldi, 2012). I used available software to analyze rich textural data from the interviews,

themes from the literature review regarding corporate governance, and the conceptual

framework of the study, agency theory. Researchers may utilize the comment feature in

Microsoft Word to highlight codes (Cater, Machtmes, & Fox, 2013). I used the comment

feature in Microsoft Word to highlight codes. Systematic analysis aided by software

supported my ability to manage and retrieve the various types of data (e.g., transcripts

and notes) across some data sets and increase the possibilities to substantiate research

claims in qualitative data analysis (Odena, 2013).

Reassembling

Reassembling is conducted by categorizing data into groups (Yin, 2014). A

researcher conducts qualitative content analysis on the themes that emerge from the

interview transcripts (Schreier, 2012). This method of analysis is one of the several

qualitative methods available for analyzing data and interpreting its meaning (Schreier,

2012). The approach represents a systematic and objective means of describing and

quantifying phenomena, especially aspects described in interview transcripts.

During the categorization, the groups of themes in the data became evident.

Reassembling includes the categorization of the themes in the interview transcripts

(Schreier, 2012) and the secondary data. Microsoft Word has tools that aid in analyzing

text (Seidman, 2013). Sorting of data is a proven method for the identification of

prevailing themes (Bishop & Lexchin, 2013). I took stock of themes that emerged from

secondary data and input them into an Excel spreadsheet. I coded the key words from the

interview responses and input them into an Excel spreadsheet. I analyzed the document

themes with the themes and key words from interviews. The categorization is crucial in

the interpretation of the data in enumerating significant findings. The categorization

helped to identify the major categories and compelling themes in the study.

Interpretation

The interpretation stage involves creating narratives from the data (Yin, 2014).

This analysis confirmed the participants’ responses to interview questions such as board

composition, separation of the role of the CEO and board chair. It included the general

performance of the bank within the past several years, including the period of the 2007–

2009 financial crisis.

I focused on the recurring themes from the interviews, relating the key themes

with the existing and new literature that emerges before final project acceptance. I also

related the themes to the conceptual framework, agency theory. I utilized methodological

triangulation to confirm or to find inconsistencies between semistructured interview

responses, member checking, and company archival records.

Concluding

Concluding involves the original research question, the data, discussion, and

interpretation of the findings (Yin, 2014). It includes significant findings and the lessons

learned in the study. Concluding involves drawing conclusions from the data (Yin, 2014).

This section of the study includes statements that describe the outcome of a research and

new insights.

A study’s conclusion reveals the key findings, the significance of the theory, and

the need for future studies (Goldberg & Allen, 2015). I related the key themes with recent

studies on corporate governance and conceptual framework. I observed the frequency of

the themes, analyze and reported my findings.

Reliability and Validity

Reliability and validity are important in research. In a doctoral study, reliability

and validity are the difference between having an acceptable study that could provide

guidance to scholars and practitioners or a study that is challenged and rejected. The

trustworthiness of qualitative content analysis is also often presented by using terms such

as credibility, dependability, conformability, transferability, and authenticity (Elo et al.,

2014).

Reliability

Reliability of a research study is dependent upon consistent information,

appropriate and reliable research methods and procedures, meticulous documentation,

unambiguous research questions, and a comprehensive research plan (Kihn & Ihantola,

2015). Dependability in qualitative research indicates the consistency of the research data

(Houghton et al., 2013). Dependability is similar to reliability and refers to the

consistency of findings across time and researchers (Hays, Wood, Dahl, & Kirk-Jenkins,

2016).

I attained dependability through adequate documentation, maintaining an audit

trail of my research study, and conducting member checking to ensure rigorous data

interpretation (Houghton et al., 2013). I conducted member checking to ensure the

dependability of the data. Member checking involves sharing the interpretation of the

participants’ interview responses with the participants to confirm that it represents their

answer (Tong et al., 2013). Member checking allows modifications and validation of the

data (Harvey, 2015).

Validity

Validity refers to the legitimacy of the findings and the extent to which data are

plausible, credible, and defensible when challenged (Venkatesh et al., 2013). Secondary

data from other sources enables validation. To ensure validity, the researcher must report

how the results were created, enabling readers to clearly follow the analysis and resulting

conclusions (Schreier, 2012). Credibility involves the focus of the research and refers to

confidence in how well the data address the intended focus (Houghton et al., 2013). To

ensure credibility, I used triangulation with semistructured interviews, member checking,

and company archival records. Credibility is the overall believability of a study (Hays et

al., 2016). The research effort was dedicated to answering the research question.

Transferability occurs when details of the study are captured and the outcomes

and findings have meaning to others in similar situations (El Hussein, Jakubec, & Osuji,

2015). Transferability is attainable when there is sufficient information to replicate the

study by future researchers (Houghton et al., 2013). The burden of demonstrating that a

set of findings applies to another context rests with future researchers rather than the

original researcher (Marshall & Rossman, 2016). Confirmability relates to the accuracy

or accurate reflections of participants’ perspectives without researchers’ views interfering

with findings (Hays et al., 2016). Confirmability is reflected in the analysis and findings

of a research study and I substantiated the confirmability of the study through member

checking (Cope, 2014).

Data saturation is attained when there is no new theme emerging from the

interview data and documentation (Liu, 2014). A method of attaining data saturation is

asking multiple participants the same questions (Fusch & Ness, 2015). I asked four

participants the same questions and utilized follow-up questions. Triangulation is the

convergence of data from different sources to determine the consistency and credibility of

a finding (Yin, 2014). According to Fusch and Ness (2015), triangulation strategies

enable a researcher to check for the existence of new relationships. Collecting and

analyzing data from different sources enables triangulation (Trangkanont &

Charoenngam, 2014).

Transition and Summary

Section 2 included discussions of the role of the researcher, the participants,

population and sampling, data collection, data analysis, and ethical research

consideration. In Section 3, I will document the research findings, analysis, and results. In

addition, Section 3 will include information on the application to business practice,

possible implications for social change, and reflections.

Section 3: Application to Professional Practice and Implications for Change

Introduction

The purpose of this qualitative single case study was to explore strategies to

improve board selection criteria that banking leaders use to promote effective

governance. Data collection involved my semistructured interviews with four business

leaders who had a minimum of 3 years’ association with the bank and possessed

knowledge on the selection criteria for board membership at the bank. Data included

interview responses as well as publicly available archival documents with financial

reports and business journals. I conducted a comprehensive analysis of this data, which

involved examining and comparing the data from different sources (see Marshall &

Rossman, 2016). This section will include (a) the presentation of the findings, (b)

application to professional practice, (c) implications for social change, (d)

recommendations for action, (e) recommendations for further research, (f) reflections,

and (g) the conclusion.

In this study, I explored board selection criteria that promoted corporate

governance from the perspective of business leaders in a bank in California. The bank has

experienced growth in its history. It did not have losses during the recent recession as the

annual reports indicated increasing growth and the bank has had more than 100

consecutive quarters of profitability. The financial and annual reports were available on

the bank’s website under the investor and financial information link.

Presentation of the Findings

The purpose of this study was to answer one overarching research question: What

strategies do banking leaders use to identify board selection criteria to ensure effective

governance? Four themes emerged from the participant responses and documents

reviewed. The themes were: (a) select independent, experienced, and knowledgeable

business leaders as board members; (b) recognize the importance of the choice of the

CEO and other senior executives; (c) acknowledge cooperation is key to sustainable

growth; and (d) promote integrity and ethics as key executive and board membership

criteria.

The participants in this study were four business leaders and board members of a

California community bank. Two were executive vice presidents and two were board

members. All the participants were knowledgeable about the bank’s board selection

criteria. During the semistructured interviews, which all occurred by telephone and lasted

for an average of 30 minutes, each participant answered a series of seven open-ended

questions that I posed to them. Technology has enabled researchers to increase the reach

of data collection via telephones (Lord et al., 2016). Telephone interviews are a genuine

alternative to face-to-face interviews in that they offer greater anonymity and enable

participants to control the privacy of the conversation (Irvine, Drew, & Sainsbury, 2013).

The participants would not permit me to record the interviews. In the interviews, I

asked probing questions, took extensive notes, read the answers provided to each question

to each participant to verify the accuracy of my notes, and mailed a succinct synthesis to

each participant to confirm the information captured. I coded the participants using

assigned codes P1 through P4. Participants P1 and P2 served as vice presidents and

Participants P3 and P4 served as board members. I interpreted the resulting data with

thematic analysis. Thematic analysis enables a researcher to identify important patterns

(Vaismoradi, Turunen, & Bondas, 2013). Recurring themes emerged in the secondary

data including publicly available archival documents with financial reports and business

journals regarding the strategies that banking leaders use to identify board selection

criteria to ensure effective governance. Recurring themes were (a) independence, (b)

vigilance and ability to monitor management, (c) diversity, (d) financial knowledge, (e)

separating the roles of CEO and board chair, (f) full-time board membership, (g) small

board size, (h) term limits for board members, (i) age limit for board members, and (j)

ethics.

Key Words

After undertaking the interviews, I compiled a list of recurring keywords in the

responses. The word CEO was the most frequently used (f = 32), followed by executive (f

= 31). These support a conclusion that the CEO and top executives are paramount to

effective governance. All participants mentioned the importance of the partnership

between the board and senior executives. According to P1, the partnership between the

board and executives has been the key to the bank’s success. The keywords of experience

(f = 19), leadership (f = 12), integrity (f = 11), knowledge (f = 10), and ethics (f = 5)

revealed important criteria for board selection. Other keywords included monitor (f = 10),

independent (f = 7), oversight (f = 4), and supervise (f = 4), which supported the

important function of monitoring.

Theme 1: Select Independent, Experienced, and Knowledgeable Business Leaders as

Board Members

The first theme that emerged from the analysis was to select independent,

experienced, and knowledgeable business leaders as board members. I identified

independence as part of the conceptual framework for this study. According to Jensen and

Meckling (1976), the primary role of the board is to monitor managerial performance due

to the inherent conflict of interest between executives and shareholders. According to the

nominating and corporate governance guidelines for the bank, dated February 2016, a

principal goal of the board is to optimize independent perspectives, give advice to the

CEO and management, increase the quality of board oversight, and lessen the possibility

of conflicts of interest.

Board members’ independence is an essential requirement for controlling

management and protecting shareholder value (Ben-Amar et al., 2013). P1 noted that all

the board members except the CEO are independent, and they review the knowledge and

experience required due to vacancy and business needs. According to the nominating and

corporate governance guidelines for the bank dated February 2016, board members seek a

broad range of skills, expertise, industry knowledge, and contacts useful to the company’s

business. Additionally, every interviewee (100%) noted that independence is a primary

requirement for board membership and effective governance. P3 remarked that board

members are entrusted with the strategic initiatives of the bank and held responsible for

providing high-level oversight to the executive team.

Seven of the eight board members at the community bank are independent board

members. A director is independent if no immediate family member is employed by the

firm and they have not been an employee of the firm or auditing firm (Conyon, 2014).

According to agency theory, board members should be able to monitor management, and

because they are expected to monitor and guide executives, their independence is critical

(Fama & Jensen, 1983). P4 explained that board members are independent and have

supervisory responsibilities over the executives of the bank. According to Nordberg and

McNulty (2013), the primary responsibilities of board members are monitoring, external

affiliation, and guidance.

The experience and knowledge of the executive and board members are intended

to promote governance while also guiding investments (Yuan et al., 2014). According to

P2, the vacuum created on the board determines the criteria for the selection of new board

members. All board members and the CEO are accomplished and have had strong

leadership experience. According to the nominating and corporate governance guidelines

for the bank, dated February 2016, all directors are expected to be knowledgeable about

the company and its industry. P1 shared that business leadership is “top on the list” as

board members utilize their insights and experience to advance shareholder value.

According to agency theory, a small board is usually more efficient than a large

board because of a decrease in agency conflicts, effective communication, and lower

operation costs (Jensen & Meckling, 1976). The bank has a small board with a total of

eight board members. According to the nominating and corporate governance guidelines

for the bank, dated February 2016, the board should be comprised of a sufficient number

of directors to enable the board to properly perform its responsibilities and achieve its

governance objectives and goals. The company’s bylaws currently provide that the board

will consist of between seven and 13 members.

My findings around this theme confirmed the existing literature. Agency theory

suggests that small boards are more efficient because they are better coordinated and have

less internal conflicts (Switzer & Wang, 2013). According to the nominating and

corporate governance guidelines, the board should be small enough to permit meaningful

participation by each director, substantive discussions of the entire board, and large

enough that committee work does not become unduly burdensome. Companies with

smaller boards have lower agency costs (Garanina & Kaikova, 2016). As for board size,

my findings were consistent with the major assumption: Companies with smaller boards

have lower agency costs (Garanina & Kaikova, 2016).

P3 explained that performance as directors and the board are evaluated annually

as stipulated by the shareholders and an important performance criterion is promoting

shareholder value. According to the nominating and corporate governance guidelines for

the bank, dated February 2016, the board believes it is important to monitor overall board

performance, to address changing needs of the company, and to bring fresh perspectives

to the challenges facing the company as circumstances warrant. According to Form 10-K

from the SEC’s (2017) EDGAR System, during 2016, the board of directors declared

quarterly cash dividends.

There is no CEO duality at the study site community bank as the CEO is not the

chair of the board. Agency theorists have asserted that there is greater board

independence when the roles of CEO and chair of the board are separate (Sarpal, 2014).

Board attendance decreases with multiple directorships (Lin et al., 2014). P2 expressed

that nominees should not be currently serving on more than two other boards and must be

capable of attending scheduled board and committee meetings.

Theme 2: Recognize the Importance of the Choice of the CEO and Other Senior

Executives

Another theme that emerged from this study was that the choice of the CEO and

other senior executives are critical to effective corporate governance. Most literature on

corporate governance focused on the role of the board, duties, responsibilities,

composition, structure, shareholder rights and activism, executive compensation, and

diversity. The study site bank's corporate governance focuses on the board as well as

senior executives. According to the bank's corporate governance guidelines, the

compensation committee conducts an annual review of the president and CEO’s

performance to ensure that the officers are providing the best leadership for the bank in

the long and short-term.

Board practices designed to achieve long-term utility are central to the

prescription of agency theory to protect owners' interests (Conheady et al., 2015).

Protection of shareholders’ interests is in line with the agency theory. There has been far

less focus in research focus in the field on the importance of the CEO and other senior

executives in corporate governance. In reality, corporate governance in banks involves

the boards and senior executives both accountable to shareholders, who must collaborate

in providing strategic decision making, compliance with laws, and protection of

depositors (Leventis et al., 2013).

In my search within Walden University’s library using the term corporate

governance on Business Source Complete with delimiters, the full text and peer-reviewed

scholarly journals from 2013 to date, yielded more than 4,740 results. Boards and

directors yielded 2,580 articles and chief executive officer and CEO as a subject term

yielded 762 (see Table 1). Clearly, most articles have focused on board members (54%)

as the most important factor in corporate governance.

Table 1

Corporate Governance Literature Research Themes

Variable Frequency Percentage

Board 1436 30.0

Directors 1144 24.0

CEO 762 16.0

Audit 473 10.0

Regulations 925 20.0

Total 4740 100.0

Many of the corporate governance problems in the past related to greed by

executives, lapses in judgment, and executive discretion (i.e., Enron, Adelphia,

WorldCom; Darrat et al., 2016). However, most researchers still focused on the board.

Boards of directors complement the regulatory oversight of executives (Henderson,

2013). The bank in this case study did not have full-time board members. As explained

by Participant P2, “We do not have full-time board members, and it is inconceivable that

directors would be informed about all the issues that occur in real-time.” Corporate

governance involves the executives of a firm, its board, its shareholders, and regulatory

agencies (Dermine, 2013).

The CEO is paramount regarding corporate governance. The collective behavior

of corporate leaders is often critical in corporate wrongdoing, and the CEO frequently

plays a central role (Khanna, Kim, & Lu, 2015). P3 noted that the daily operations of a

bank are the responsibility of the executive management. This is further confirmed by

existing literature. According to Starbuck (2014), it is important to improve executive

management governance.

Directors often face limited access to firm-specific information, and the high cost

of assessing the reliability of information and these limitations reduce their monitoring

effectiveness (Fama & Jensen, 1983). According to Nordberg and McNulty (2013),

responsible boards of directors take ownership of their role and actively oversee activities

in their firms. While this is important, the role of the CEO is paramount. CEOs have

substantial influence in addition to the explicit legal authority to direct corporate affairs

(Khanna et al., 2015). Business leaders, the board of directors, and audit committees must

maintain the integrity and the public trust (Franzel, 2014).

Theme 3: Acknowledge Cooperation is Key to Sustainable Growth

The third theme was that cooperation, rather than strict monitoring, is the key to

sustainable growth. This is confirmed by current literature. In light of past corporate

scandals, companies are paying more attention to corporate governance practices,

particularly aligning the interests of stakeholders and managers to minimize the exposure

to the principal-agent problem (Garanina & Kaikova, 2016). The participants’ claim that

cooperation, rather than strict monitoring, is the key to sustainable growth disconfirms the

main conceptual theory. P1 declared that “an effective board uses their knowledge and

experience to complement the strategies by the CEO.”

The agency theory demands sufficient monitoring to align agency interests (Fama

& Jensen, 1983). According to agency theory, candidates for board membership should

be selected based on their ability to monitor management (Fama & Jensen, 1983).

However, a recurring theme in the participant interview responses aligned with another

governance theory, the stewardship theory. Under stewardship theory, the relationship

between the board and CEO is cooperative with the board working collaboratively with

the CEO (McNulty, Florakis et al., 2013).

The participants emphasized that collaboration was key to the bank’s success.

According to publicly available bank’s financial disclosures, the bank has demonstrated

strong and sustained financial performance and positive earnings for more than 100

consecutive quarters. Each participant commented that cooperation is the key to their

sustained growth. According to P4, the majority of shareholders, the executive team, and

the board are “on the same page,” as they “all work for and are accountable to the

shareholders.” In addition, as noted in the nominating and corporate governance

guidelines for the bank dated February, 2016, other important factors to be considered by

the nominating committee in the selection of nominees for the position of a director

include ability to work together as an effective group and the ability to commit adequate

time to serve as a director.

The interview responses supported some assertions that the board may work

cooperatively with the CEO when interests align in pursuance of shareholders’ goals.

Stewardship theory affirms the synergies derivable between members of the board and

CEO, which positively influence organizational performance (Mowbray & Ingley, 2013).

According to the bank’s annual reports, the bank has sustained financial performance and

delivered a cash dividend for more than 100 consecutive quarters. P2 emphasized that the

board and CEO have demonstrated a strong focus on increasing long-term shareholder

value. According to the bank's corporate governance guidelines, the board and CEO’s

performance are assessed on both short and long-term outcomes.

Theme 4: Promote Integrity and Ethics as Key Executive and Board Membership

Criteria

Board member selection criteria are important and include knowledge and

experience (Elms et al., 2015). The CEO is not a member of the nominating committee of

the bank. In the nominating and corporate governance guidelines for the bank dated

February, 2016, the nominating committee shall be comprised of directors who qualify as

independent directors. Integrity as a key executive and board membership is an important

theme that emerged from this study.

Some interviewees made statements that integrity was an important board

selection criterion. According to P2, the articulation of the vision of putting people with

integrity in executive positions to execute is indispensable to effective corporate

governance and success for the bank. As stated in the nominating and corporate

governance guidelines for the bank, another important factor to be considered by the

nominating committee in the selection of nominees for the position of director is

community involvement.

The importance of integrity was affirmed by P3, who shared that nominees

selected to serve on the board have all demonstrated a reputation for honesty and

adherence to high ethical standards. Unlike the inherent divergence of interests

propounded by the agency problems which is the basis for shareholder calls for boards to

implement effective governance (Jensen & Meckling, 1976). Existing literature confirms

this affirmation. In the area of director selection, proven moral integrity could become a

point to investigate before appointment as a director (Grant & McGhee, 2017). Board of

directors must maintain integrity to uphold the capital market and economic well-being

(Franzel, 2014). The integrity of the board is pivotal to fostering shareholder trust

(Perrault, 2015).

Pitelis (2013) asserted that there should be an ethical dimension in managing the

affairs of the company. The ethical dimension and integrity are more aligned to the

trusteeship theory. In trusteeship theory, executive management and board members

behave transparently and conscientiously (Balasubramanian, 2009). The lack of integrity

of some executive leaders relates to the conceptual theory for this study. The boards of

directors are; therefore, empowered to monitor the CEO and protect shareholders’

interests. Knowledge in the discipline is considered in the selection of the appropriate

directors to undertake this monitoring.

The potential for opportunistic behavior and excessive risk taking by the CEO in

organizations is a primary governance issue (Arce, 2013). Female directors enhance the

integrity of the board and promote shareholder trust (Perrault, 2015). Board diversity

enhances the integration of different perspectives and allows for better decision making

(Sun et al., 2015). Mateos de Cabo et al. (2012) argued that gender-diverse boards are

tougher monitors of CEOs. In this case study, a gender diversity of the bank’s board was

observed: two women and six men. However, no participant mentioned gender diversity

as a selection criterion for board membership.

Corporations with good governance, have boards that are morally accountable to

shareholders (Nohel et al., 2014). P1 explained that “in addition to board membership,

much depends on the quality of the CEO and chief financial officer (CFO).” According to

the bank's corporate governance guidelines, Directors are expected to act ethically at all

times and to acknowledge their adherence to the bank’s Code of Ethics. Encouragement

can be taken from the field of ethical decision making in which studies have found that

certain personal ethical values or value orientations are linked to ethical or unethical

behavior in business (Grant & McGhee, 2017).

The first theme that emerged from the analysis was to select independent,

experienced, and knowledgeable business leaders as board members. Khosa (2017)

confirmed this finding, reporting that independent directors play a major role to stop

unchecked discretion in an environment where agent–principal conflict exists. Another

theme that emerged was that the choice of the CEO and other senior executives are

critical to effective corporate governance. Zhang, Zhang, Jia, and Ren (2017) concurred

with this finding, stating outside directors and influential CEOs greatly influence

corporate governance and firm performance.

The third theme is that cooperation, rather than strict monitoring, is the key to

sustainable growth. The decade starting in 2010 is often referred to as the shareholder

spring, when a number of corporations, principally in the United States and United

Kingdom found themselves at the receiving end of shareholder ire following the passing

of the Dodd-Frank law (Subramanian, 2017). Congress created the Dodd-Frank Wall

Street Reform and Consumer Protection Act to rein in financial malfeasance; however,

congress is rolling is back this legislation with the introduction of the Financial Choice

Act (Fraser, 2017).

The fourth theme is to promote integrity and ethics as key executive and board

membership criteria. Studies in the field of decision making have found that personal

ethical values or value orientations relate to ethical or unethical behavior in business

(Grant & McGhee, 2017). Liborius (2017) confirmed this finding, reporting that

leadership integrity refers to the consistency of a leader’s words and actions, which

includes reliable, honest, and promise-keeping behavior and has significant outcomes for

the organization in terms of performance, trust, satisfaction. Van Esterik-Plasmeijer and

van Raaij (2017) concurred with this finding, stating trust in banks and other financial

institutions are crucial for the functioning of the banking system and for society at large

and major determinants of trust are value congruence and integrity.

Applications to Professional Practice

The findings, conclusions, and recommendations from this study may contribute

to effective corporate governance in banks and corporations. Business leaders may utilize

the results in the selection of board members and executive leaders to enhance corporate

governance. The four themes that emerged were: (a) select independent, experienced, and

knowledgeable business leaders as board members; (b) recognize the importance of the

choice of the CEO and other senior executives; (c) acknowledge cooperation is key to

sustainable growth; and (d) promote integrity and ethics as key executive and board

membership criteria.

Banks are important as a source of finance for most businesses; consequently,

strong corporate governance remains vital to the economy (Capriglione & Casalino,

2014). The findings may help to solve the problem of corporate scandals and corporate

greed that result in economic depression. By selecting independent board members,

organizational leaders would be able to monitor the executives in firms where such

monitoring is desirable. The selection of experienced business leaders to serve as board

members is essential in enabling the board to have a good understanding of the many

issues financial institutions face (i.e., primarily specialized and emerging issues such as

cybersecurity, technology, legislation, and globalization). Experience and proven

leadership are strategic advantages in the selection of board members. It is also important

to select directors that have adequate time for their board duties. Busy and distracted

directors may be ineffective and cause corporate governance (Lin et al., 2014).

The findings may aid business leaders in revising selection criteria for the senior

executives, including the CEO, CFO and chief legal officer. These senior executives

monitor bank operations for misconduct and engage legal resources in advising the CEO

and the board on compliance issues. Business knowledge and experience are important

attributes in the selection of these executives. In addition, business leaders should use

selection criteria that put a premium on other attributes of enduring value. The board is

the safeguard of the interests of the dispersed shareholders (Sur, Lvina, & Magnan,

2013). The executives are wholly responsible to the shareholders. When the monitoring

of executives is the prime focus of the board, the board is less effective as a partner in the

growth of the corporation. Cooperation rather than strict monitoring is the key to

sustainable growth.

The findings may be relevant to improved business practice. Ineffective corporate

governance was the primary cause of excessive managerial risk-taking in the financial

sector and the financial crisis from 2007–2009. Business leaders should make integrity

and ethics a key criterion for executive and board membership. Harp et al. (2014)

concluded that regulatory compliance, with a strong ethical orientation, can lead to the

selection of board members and executive leaders that demonstrate strong ethics and

integrity‒this leads to improved corporate governance and performance.

Implications for Social Change

Implications for social change include encouraging business leaders to adopt

board selection strategies that promote corporate governance. When board members and

executive leaders who are experienced, knowledgeable, and ethical are engaged in a

bank, the positive results are transmitted to many other businesses. A responsible hand at

the helm of banking and financial corporation’s affairs may prevent corporate fraud,

greed, and malfeasance that lead to failure, economic meltdown, and global recession.

Ineffective corporate governance are the harbingers of the type of recession that

the global economy experienced 2007 to 2009. Rather than leading to corporate failure,

and high unemployment, the success of financial institutions could promote the wellbeing

of many. The positive performance may result promote improved individual welfare and

living standards for all corporate stakeholders. Effective corporate governance strategies

may lead to protection of all stakeholders, including shareholders, employees, customers,

suppliers, and society as a whole (Bistrova et al., 2014).

Recommendations for Action

Business leaders may consider utilizing corporate governance in strategy

formulation and execution by implementing the strategies discussed in the emerging

themes of the study. When selecting board members, it is important to consider many

factors. Volonte (2015) stated that corporate governance is crucial to financial

performance. Ineffective corporate governance is a result of weak oversight (Dymski et

al., 2013). To counter this, business leaders should select independent, experienced, and

knowledgeable directors as board members. Directors have responsibilities to

shareholders who have entrusted them to maximize their returns from their investments

(Bilchitz & Jonas, 2016).

Equally important is the selection criteria and choice of CEO and other senior

executives. The executives are responsible for enhancing shareholder value and have

responsibilities to their employees and customers as well. The knowledge and experience

of the CEO and board members are intended to promote governance (Yuan et al., 2014).

Business leaders should include governance consideration in their selection of executive

leaders. Business leaders should ascertain that long-term and sustainable objectives are

the focus and to ensure alignment of goals and objectives from the start. It will also help

if executive remuneration and evaluation are designed to align with shareholder interests.

A recommendation is to utilize an incentive contract. An incentive contract is

when a corporation attaches performance targets to equity grants (such as stock options)

to strengthen the association between executive compensation and firm performance

(Abernethy et al., 2015). This compensation method may help to further align shareholder

interests with executive focus. In organizations with minimal agency problem,

cooperation rather than strict monitoring is the key to sustainable growth. As

recommended by Warren Buffett, performance should be the basis for executive pay and

incentives (Bowen et al., 2014).

Decision-making by directors should not only focus on short-term financial results

but also the importance of building longer-term relationships and involves striking a

balance between the competing interests of different stakeholders to benefit the

shareholders in the long term (Bilchitz & Jonas, 2016). Business leaders should make

integrity a key executive and board membership criterion. A greater emphasis on ethics is

needed to enhance corporate governance practice (Grant & McGhee, 2017).

Business leaders should be encouraged to pay attention to the results of this study.

I will continue research on related topics. I will publish excerpts from this study and write

articles for publication in professional journals on effective corporate governance. I may

also present the results from this study as best practice in corporate training, conferences

and at seminars.

Recommendations for Further Research

In Section 1, I noted that a limitation of this study was the honesty of the

participants in discussing the board selection criteria of their bank. I mitigated this

limitation by asking open-ended questions. Open-ended research questions facilitate the

gathering comprehensive responses (Starr, 2014). I also allowed participants to answer

without interruption and asked the same interview and follow-up questions. In future

research, reproducing the study with other banks and other financial institutions may

support the results or add to the knowledge obtained from this study.

Another limitation identified was the degree of forthrightness and candor of my

participants in identifying and discussing all the effective corporate governance practices

and strategies that have been critical to preventing corporate crises and resulting in the

success of the bank. I mitigated this by engaging in telephone interviews. According to

Lord et al., (2016) telephone interviews promote forthrightness. Future researchers should

consider reproducing the study with a larger sample size to increase the probability of

complete forthrightness and candor.

Another limitation that I identified was that banks were different in size and

market capitalization and that the bank I had selected may not be representative of most

banks. To mitigate this, I chose a medium-sized bank for my single case study. Future

researchers should consider reproducing the study with both larger and smaller banks and

other financial institutions.

Exploring the strategies that banking leaders use to identify board selection

criteria to ensure effective governance led to the emergence of some themes that future

researchers may pursue. I designed the study to focus on one medium-sized bank, which

is not representative of all types of banks. Future researchers may wish to undertake

similar studies in small and large banks. In addition, future researchers may resist

yielding to assumptions in undertaking their research. One assumption of this study was

that bank boards are critical to effective corporate governance. It may be prudent to ask

what the leaders find important toward effective corporate governance.

It would be worthwhile to undertake additional research on the utility of engaging

full-time board members. Directors are important as checks and balances and uphold

shareholder interests. Directors have the fiduciary duty of loyalty and must put the

company’s interests first. Researchers may consider exploring whether serving as a

fulltime director in only one organization would improve attendance at meetings, increase

industry and firm-specific knowledge; higher engagement in the firm’s affairs may

translate to improved corporate governance and performance.

It is important to examine the effect of corporate governance in a firm with

significant agency issues when the CEO who serves on the board and is a member of the

nominating committee. Making the board of directors, their compensation, and

nominating committees more independent and accountable is important for governance

(Conyon, 2014). According to Lixiong and Masulis (2015), the composition of the

nominating committee could affect not only the composition of the entire board but also

the independence of directors, and ultimately, the quality of board oversight. The

nominating committee is responsible for new director nominations for election at the

annual meetings, and the committee is also usually responsible for evaluating individual

director performance and approving their re-nominations (Lixiong & Masulis, 2015).

Of utmost importance is the need for future research on selection strategies for

chief executive officers. It may be beneficial to undertake further research on viable

methods and best practices to measure the integrity of prospective CEO’s and board

members. A study which examines existing methods and good practices that have been

successful in selecting strong ethical leaders with integrity could improve business

practice and performance.

Reflections

Most business entities and large segments of the population are affected by the

state of the economy, especially a severe worldwide recession that lasts for years and

leads to chronic unemployment. The questions arise as to who were those responsible,

what is the business process in which business leaders are held accountable, and what are

the criteria for selecting such leaders? If those responsible include business leaders, then

selecting the best leaders is imperative toward preventing future corporate crisis and

economic depression. There is the continuing need to study best practices when selecting

business leaders that promote and maintain effective corporate governance?

This doctoral study began as a quantitative multiple regression study. The

independent variables were (a) the independence of the board represented by the number

of outside directors; (b) gender diversity of the board, as measured by female board

members; and (c) the dual role of CEO/board chair measured by whether the CEO is also

the board chair. The dependent variable was corporate financial performance measured

by net profit margin. A qualitative method later emerged as the best approach for this

study. The research study is of importance to most business concerns. The study was

designed to focus on effective corporate governance and the important role of directors of

corporate boards in banks. The research was designed to uncover the selection criteria

that was used by a successful bank for effective corporate governance.

I was prepared to learn about and articulate factors such as the importance of

educational attainment, demographic diversity, independence, democratic director

selection methods, and so on, but was surprised to discover that the most important

determinant of corporate governance was the choice of an experienced, knowledgeable,

and ethical CEO with integrity. I have a greater appreciation that effective corporate

governance is achievable when the enduring interests of shareholders, board members,

and senior executives are aligned, and the appropriate strategies are designed and

executed.

Conclusion

Effective corporate governance is essential to banks and businesses. For effective

corporate governance, firms must ensure that the interests of the shareholders and the

executives are aligned and minimize agency issues. The agency issues in different banks

and corporations are not the same. While some corporations may experience significant

difference and misalignment in the motivations of the CEO and shareholders, others may

not have significant agency issues. In some organizations, board members capable of

effective monitoring are desirable. In the other organizations, monitoring is not the

primary focus, but cooperation is the key to sustainable growth.

Four themes emerged from this study. The themes were (a) select independent,

experienced, and knowledgeable business leaders as board members; recognize the

importance of the choice of the CEO and other senior executives; acknowledge

cooperation is key to sustainable growth; and promote integrity and ethics as key

executive and board membership criteria. The findings may aid business leaders in

formulating and executing effective corporate governance strategies.

Our social well-being depends in part on our economic well-being. Our nation’s

economic well-being and corporate success is a determinant of how our government may

fulfill its many obligations and our prosperity. Our prosperity hinges upon sustainable

practices of businesses and their performance and is reliant on effective corporate

governance. Identifying and proposing board member selection criteria may improve

corporate governance, which could result in better business practices and performance.

Corporate governance that enhances longer-term shareholders and stakeholder interests

are desirable and in the interests of business professionals, employees, customers,

communities, and the economy.

Students also viewed