Why did a bank with good governance perform worse during the financial crisis? The views of shareholder and stakeholder orientations

Studies find that banks with good governance performed poorly during the 2007–2008 Global Financial Crisis. We examine this “good governance puzzle” by comparing the performance of banks with shareholder-orientated governance to those with stakeholder-orientated governance, where the former focuses more on shareholders' interests and the latter focuses more on non-shareholders' interests in addition to shareholders' interests. Using global bank data, we construct a stakeholder-friendly index and compare it to a shareholder-friendly index to analyze their relations with banks' profits and risks in both the crisis and pre-crisis periods. We argue that the banks under shareholder-orientated governance performed worse during the crisis period but better during the pre-crisis period, while banks under stakeholder-orientated governance behaved oppositely due to their different attitudes toward risk. Our findings confirm our argument and explain the puzzle, thus supporting the literature that shows the governance model should be sector-specific and that stakeholder-orientated governance prevented banks from having huge losses in the crisis.