Corporate Governance with Weak Institutions: Banks in Russia and the Ukraine

This paper investigates the impact of corporate governance on performance in an environment with weak institutions. We use a proprietary survey of 107 banks in Russia and 50 banks in Ukraine surveyed by International Financial Corporation in 2003-2006 and find weak relationship between governance and subsequent performance. We argue that the theory of firm level corporate governance mechanisms and their relationship to performance needs to explicitly take into account the institutional environment in which a firm operates. Specifically, we propose that voluntary adopted corporate governance mechanisms are ineffective in banks in countries with extremely weak institutional environment. Our paper also reinforces the notion of formal governance chains put forth by Dyck (2001) and suggests that for the chain to work the crucial links (such as institutional and legal infrastructure) must be in place before other links (such as firm level governance mechanisms) can work properly.