The Beauty of Being Involved: The Case of Cooperative Banks
| Published date | 01 October 2023 |
| Author | Franco Fiordelisi,Stefano Grimaldi,Juan Sergio Lopez,Maria Carmela Mazzilis,Ornella Ricci |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12698 |
British Journal of Management, Vol. 34, 2290–2311 (2023)
DOI: 10.1111/1467-8551.12698
The Beauty ofBeing Involved: The Case of
Cooperative Banks
Franco Fiordelisi,1Stefano Grimaldi,2Juan Sergio Lopez,3
Maria Carmela Mazzilis3and Ornella Ricci4
1Essex Business School, University of Essex, Colchester, CO4 3SQ, UK, 2EGS (Economia, Geograa,
Statistica), Rome,00136, Italy, 3Economic Analysis and Statistical Reporting Department, Italian Federation of
Cooperative Banks (Federcasse),Rome, 00178, Italy, and 4Department of BusinessStudies, Universityof Roma
Tre, Rome, 00145, Italy
Corresponding author email: franco.ordelisi@essex.ac.uk
Is greater stakeholder engagement associated with greater stability? Weprovide readers
with novelempiricalevidence that this is indeed the case. Cooperativebanks (where stake-
holders are involved in the business by law) arean excellent case to study the association
between stakeholder engagement and stability. Focusing on Italy, we show that cooper-
ative banks differ substantially in risk-taking from each other, and these differencesare
mostly related to the engagement of stakeholders. A greater overlap between sharehold-
ers, borrowers and depositors is associated with lower non-performing loans, suggesting
that greater stakeholder engagement reduces problems of asymmetric information and
bank risk appetite.
Introduction
Over past decades, the academic literature has
discussed widely whether modern corporations
should focus on maximizing shareholder value
(SHV) or considering every stakeholder’s interests.
The classical theory takes an SHV maximization
perspective, which holds that company directors
have the duciary duty to conduct the company’s
affairs in the interests of shareholders. Corpora-
tions are accountable only to prot-maximizing
shareholders and, apart from their contractually
determined obligations, are not responsible for
considering other stakeholders’ interests or en-
hancing the welfare of society (Bénabou and Ti-
role, 2010; Friedman, 1972). In this theory, engag-
ing in environmental and social initiatives can de-
stroy shareholder wealth and have negative nan-
cial implications, diverting managers’ attention to
issues that are not central to the company and in-
creasing costs to the advantageofcompetitors (e.g.
Brown, Helland and Smith, 2006; Jensen, 2001).
Conversely, the stakeholder view attempts to bal-
ance the interests of everyone with a stake in the
company; the management of a business requires
the balancing of the stakeholders’ interests, such as
providing employee benets, investing in environ-
mentally friendly production processes, selecting
suppliers that avoid child labour and organizing
projects to help the poor in less-developed coun-
tries (Gamble and Kelly, 2001). This alternative
view is based on the belief that meeting the needs
of all stakeholders can also enhance SHV creation,
for example, avoiding consumer boycotts, reputa-
tional damage, government nes and the inabil-
ity to attract the most talented staff (e.g. Freeman
et al., 2010; Serafeim, 2013).
There is no conclusive evidence proving whether
greater stakeholder engagement is benecial or
detrimental to companies. The management lit-
erature has several papers investigating whether
directors’ duciary role is toconduct business
in the interests of shareholders or other stake-
holders (e.g. Cumming, Tingle and Zhan, 2021;
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf ofBritish Academy
of Management.
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs Li-
cense, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-
commercial and no modications or adaptations are made.
The Beauty of Being Involved2291
Ding et al., 2022; Tingle and Spackman, 2019).
Moreover, some authors (e.g. Thakor and Quinn,
2013) suggest that organizationsoriented to wealth
maximization – in an exclusive way – and organi-
zations pursuing a ‘higher purpose’ are not nec-
essarily alternatives. They may be complementary
to each other and have a symbiotic relationship.
Chronopoulos, Yilmaz and Wilson (2022) under-
line that the impact of stakeholderism on various
rm-level outcomes has been the subject of vibrant
debate for non-nancial rms, while it remains
substantially overlooked in the banking industry.
This is particularly surprising since banks operate
with a more heterogeneous group of stakehold-
ers than non-nancial rms – including deposi-
tors, households, small and medium enterprises
(SMEs), corporate and sovereign borrowers, em-
ployees,regulators, supervisors, shareholders,debt
holders, other banks and monetary authorities –
facing unique challenges in balancing their con-
icting interests (Cumming, Girardone and Sliwa,
2021). Moreover, Leung, Song and Chen (2019)
outline that the banking sector is a particularly in-
teresting setting to analyse the diverging risk pref-
erences of shareholders and stakeholders because
banks are highly leveraged and opaque, face lim-
ited disciplining from insured depositors and have
implicit government guarantees, promoting exces-
sive risk-taking by shareholders.
Finally, the banking industry is a particularly
interesting case as it is characterized by a high
level of ‘biodiversity’, withthe coexistence of SHV
banks (whose primary business focus is maximiz-
ing shareholder interests) and stakeholder value
(STV) banks, whose broader focus is on the inter-
ests of a wider group ofstakeholders (Ayadi et al.,
2010). Cooperative banks are STV banks, in which
protabilityis neither the primary nor the exclusive
goal, even though it is necessary to survive and -
nance growth in their reference area.
While commercial banks are private rms that
essentially aim to create value for sharehold-
ers (Fiordelisi and Molyneux, 2006), cooperative
banks aim to meet the needs of their sharehold-
ers (most of whom are also depositors and bor-
rowers) and support non-prot agents (e.g. hospi-
tals and charity organizations) in local areas rather
than focusing on prot maximization. Girard and
Sobczak (2012) outline the peculiarity of coopera-
tive shareholders, observing that they are difcult
to categorize in the most commonly used stake-
holder mapping since they are both shareholders
and clients, and occasionallyeven bank employees,
playing more roles at the same time. This is why
shareholders in cooperative banks are also called
‘members’. In SHV banks, there is a conict of in-
terest between shareholders and depositors since
the former have limited liabilities and may bene-
t from upside gains and higher risk exposure. In
STV banks, this particular aspect of the agency
problem is absent as owners and customers are
largely one and the same. Furthermore, coopera-
tive banks comply with the key cooperative princi-
ple of ‘one person, one vote’ regardless of the num-
ber of shares held.
Cooperative banks have both advantages and
disadvantages compared to commercial banks. As
consumer-owned institutions, managers of coop-
erative banks are more subject to accountabil-
ity than managers of commercial banks (Fama
and Jensen, 1983). Moreover, cooperative banks
are viewed as overcoming the asymmetric infor-
mation problem typical of nancial intermedia-
tion (Fonteyne, 2007) and reducing moral hazard
(Fonteyne and Hardy, 2011) better than commer-
cial banks; a large number of cooperative banks’
shareholders are also borrowers, and thus banks
can rely on a larger set of information resulting in
a lower adverse selection problem. Similarly, be-
cause the owners are also depositors, cooperative
banks avoid cost of agency conicts (see Mayers
and Smith, 1988 for mutual insurance companies
and Rasmusen, 1988 for mutual banks), resulting
in a lower moral hazard problem. The close rela-
tionship between bank staff and customers also
reduces such agency conicts, whereas large com-
plex banks do not engage in relationship banking
(Boot and Thakor, 2000; Stein, 2002). These fea-
tures give cooperative banks a low-risk prole and
high capitalization relative to commercial banks
(Groeneveld, 2014). However, cooperative banks
are smaller in size and customer number, possi-
bly resulting in lower managerial skills (e.g. risk
management and compliance departments are less
developed than those of commercial banks) and
lower diversication opportunities. Overall, these
factors may lead to lower prots and, especially,
unintentional and excessive risk-taking.
The comparison between cooperative and com-
mercial banks provides researchers with a good
setting to compare rms with shareholders’ and
stakeholders’ orientations. Unsurprisingly, a large
© 2022 The Authors.British Journal ofManagement published by John Wiley & Sons Ltd on behalf of British
Academy of Management.
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