Received: 24 August 2020 Revised: 21 March 2022 Accepted: 27 March 2022

DOI: 10.1002/ijfe.2620

RESEARCH ARTICLE

Clarifying the impact of corporate governance

and intellectual capital on financial performance:
A longitudinal study of Deutsche Bank (1957–2019)

Tasawar Nawaz1 | Oliver Ohlrogge2

1
Plymouth Business School, University of
Plymouth, Plymouth, UK Abstract
2
VISUS Advisory GmbH, Erkelenz, This article empirically examines the nexuses between corporate governance,
Germany intangible resources, CEO traits, and financial performance. In contrast to
prior research, this study examines these relationships in a longitudinal man-
Correspondence
Tasawar Nawaz, Plymouth Business ner focusing on Deutsche Bank for the 1957–2019 period. To the best of our
School, University of Plymouth, knowledge, this study is the first of its kind. Based on a novel hand collected
Plymouth, UK.
dataset, our analysis suggests a significant positive relationship between intan-
Email: [email protected]
gible assets i.e., intellectual capital efficiency and financial performance mea-
sured by, return on assets (ROA) and return on equity (ROE). Our results
further suggest that human capital efficiency drive the financial performance
of Deutsche Bank at all times especially, during the economic malaise periods,
suggesting that human capital is the main source of profitability for the
Deutsche Bank. Additional results suggest that larger board size diminishes
the impact of intangible resources on financial performance when the former
CEO assumes board's chairmanship. Finally, our results suggest that CEO's
education quality is an important determinant of financial performance during
the crisis. Results observed in this study have important economic and policy
implications for banks operating in the similar environments.

KEYWORDS
board diversity, CEO education quality, Deutsche Bank, financial performance, human
capital efficiency, intellectual capital

1 | INTRODUCTION interest paid to savers. The rapid liberalization after the

1980s resulted in conventional banks developing new
Every organization has its own business model that business models involving, among others, securitization
enables it to create and deliver economic value to the of loans, investments, and trading activities, and the use
society. The traditional business model of conventional of credit derivatives. The high-risk nature of such
banks has been to generate income from the difference interest-based products has also been partly blamed for
between the interest charged to borrowers and the the financial crisis of 2007–2009.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided
the original work is properly cited.
© 2022 The Authors. International Journal of Finance & Economics published by John Wiley & Sons Ltd.

3808 wileyonlinelibrary.com/journal/ijfe Int J Fin Econ. 2023;28:3808–3823.

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NAWAZ AND OHLROGGE 3809

In today's knowledge driven economic era, organiza- capital stocks. It is thus the fiduciary responsibility of the
tions are shifting from tangible physical capital resources corporate board to ensure that managers have a continuous
to intangible resources to create value and sustain com- supply of these resources to create value not only for the
petitive advantage. This is relevant to survive in the mod- principals but for a larger pool of stakeholders.
ern, globalized and hardly dynamic business In the same vein, Nawaz et al. (2020) argues that
environment. Organizations need to cope with these value creation in today's knowledge-intensive era
drastic changes to profit from intangible resources with requires the financial institutions such as banks to
the aim to increase performance and competitiveness. maintain and strengthen their stocks of tangible and
For this reason, a rapid change from the production era non-tangible resources, largely referred to as the intel-
to the knowledge era is being witnessed in economies lectual capital resource base, hinting to study the
around the world. impact of corporate governance and intellectual capital
Banking and finance sector is the backbone of any resources in a collective manner. Equally, research
country economy. It is one of the most knowledge-intensive notes that agents including the Chief Executive Officer
sectors within any country economy (Nawaz, 2019). Banks (CEO) possess certain talents and abilities subsumed
being the financial services providers profoundly rely on under CEO traits that influence corporate outcomes
intangible assets to maintain quality service as well as prof- (for example see, Hambrick & Quigley, 2014).
itability in the ever-challenging business environment Despite the breadth and depth discussed in the exis-
(Nawaz et al., 2020). Banks are relatively opaque, complex, ting empirical investigations, the reported results are
and skill-intensive organizations, largely driving their mixed, at best, and they call for further investigation
profits from intangible assets, also referred to as intellectual into the phenomenon. Notability, there remains a
capital. Intellectual capital is defined as the knowledge severe dearth of longitudinal studies in the context of
resources used to create value and attain competitive advan- banking and finance sector. With this background, we
tage in the market. The significance of intellectual capital investigate the impact of corporate governance, includ-
(IC) in gaining and sustaining superior performance in the ing CEO traits and intellectual capital profiles on the
banking sector is well documented (see Nawaz et al., 2014; financial performance of Deutsche Bank for the 1957–
Nawaz & Haniffa, 2017). 2019 period. We argue that the real impact of intangi-
IC studies have considered various banking sectors ble resources can be witnessed in a longitudinal study
around the world, using different time periods and sam- because intangible assets take longer to develop inter-
ple size, ultimately producing mixed results. Yet, there nally and if acquired externally, they take longer to
remains a flurry of empirical work examining the impact match the organizational culture and only influence
of intellectual capital on organizational outcomes in a corporate performance in the longer run. In doing so,
longitudinal manner, especially in the banking services we hope to explain the impact of corporate governance
sector (few notable exceptions from the non-financial sec- and intellectual capital on corporate performance in a
tor are, Campbell and Rahman (2010) and De Silva prudent manner. Equally, we aim to enrich multiple
et al. (2014)). This study fills this gap by conducting a lon- literature streams such as corporate governance, intel-
gitudinal study, first of its kind, into the impact of intel- lectual capital, and bank performance with new
lectual capital on financial performance of Deutsche insights derived from a longitudinal study.
Bank for the period 1957 to 2019. Specifically, we add to the intellectual capital litera-
On the other hand, corporate outcomes which finan- ture in general and the IC studies in the banking and
cial performance is but one of them profoundly relies on finance (Joshi et al., 2013; Nawaz & Haniffa, 2017) by
good governance mechanisms to constrain agency prob- providing, first of its kind, longitudinal evidence on how
lem and moral hazard (Nawaz, 2019). The significance of IC and its subcomponents affect the performance out-
corporate governance is well recognized in the banking comes of a leading global bank. While we supplement
(De Cabo et al., 2012; Nawaz et al., 2020; Pathan & the handful of longitudinal studies in the IC literature
Faff, 2013) and non-banking sectors, including third- (Campbell & Rahman, 2010; De Silva et al., 2014), results
sector organizations (see, Nawaz, 2021). Besides, a few presented in this study extend our understanding of IC in
country-specific studies have been published, exploring value creation in a banking organization overtime. Relat-
the significance of governance practices in Germany edly, our results for the human capital efficiency provide
(e.g., Hackethal et al., 2005). Nawaz and Haniffa (2017) new insights for the human capital theory of
note that corporate boards are responsible to watch over Pfeffer (1994), in recognizing the significance of human
the organizational resources including, financial, physical, capital in maintaining and sustaining corporate perfor-
tangible, and intangible resources such as the intellectual mance in the financial services sector over a longer
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
3810 NAWAZ AND OHLROGGE

period (Nawaz, 2019; Richard, 2000). Furthermore, advantage and link this to the impact of intangible assets.
results observed for the internal governance and monitor- The resource-based view of the firm contends that the over-
ing mechanisms add to the lively debate in the corporate all performance of a firm can largely be attributed to
governance literature on the effectiveness of governance resources it owns, which are essential for sustainable com-
apparatus in large banking organizations (De Cabo petitive advantage in the market. The theory suggests that
et al., 2012; Nawaz et al., 2020; Pathan & Faff, 2013). firms realize competitive advantage by an efficient allocation
Lastly, our results related to the agent heterogeneity of organizational resources at their disposal (Barney, 1991).
underscore which CEO talent matters to the corporate Moreover, the theory asserts that the prime focus of the
performance outcomes measured by the financial prox- management is to preserve a competitive advantage, which
ies: return on assets (ROA) and return on equity (ROE), is fundamental for earning high profits (Richard, 2000).
thereby, enriching an evolving literature stream Financial services firms such as banks possess a diver-
(Hambrick & Quigley, 2014; Nawaz, 2021). gent bundle of resources with high levels of complexity
Results observed in this study have policy and eco- and inimitability and the ownership of those resources is
nomic implications that go beyond Deutsche Bank and the key factor for earning profits. Richard (2000) notes
can potentially serve a larger pool of stakeholders such as that people or human intellectual capital are the most
bankers, financial analysts, investors, academics/ important asset for service providers such as banks for
researchers, and the civic society, at large. Arguably, intan- gaining competitive advantage. In contrast, structural
gible assets such as IC has gained impetus resulting from intellectual capital, such as process or technologies, and
the technological advances in the financial services sector capital employed is not challenging to replicate. For this
also referred to as the FinTech, which has exposed the reason, human intellectual capital can be seen as an
incumbents such as the Deutsche Bank in focus to some of essential factor (Nawaz, 2017; Pfeffer, 1994). Barney (1991)
the unanticipated challenges. Besides, heightening compe- adds that competitive advantage is built on firm-specific
tition from Open Banks and the emerging trends in the recourses and these resources can be classified into four
financial markets such as the use of blank cheque compa- different characteristics, which are valuable, rare, imper-
nies or special purpose acquisition company (SPAC) in fectly imitable, and non-substitutable. A valuable resource
raising capital, are having direct impact on the bottom line must create a surplus and to minimize inefficiency. A rare
of traditional commercial and investments banks and there resource can produce value, which is unlikely to be repro-
is no exception for Deutsche Bank. These factors add fur- duce by all competitors of the firm simultaneously. An
ther credibility to the arguments presented in our study by imperfectly imitable resource is very difficult to imitate by
stemming the fact that competitive advantage lies in the competitor due to advanced technologies or complexity. A
efficient allocation and deployment of intangible resources. non-substitutable resource cannot easily be exchanged by
Thus, we suggest the banking and finance industry to capi- another resource, which is either not imitable or rare.
talize on the intangible assets, should they wish to sustain Banks, such as the Deutsche Bank in focus, create
competitive advantage and remain profitable even relevant value by offering products such as banking accounts or
-in this knowledge driven economy. loans and other financial services i.e. financial advice or
The paper is structured to discuss the theoretical money transfer. To offer those products and services in
underpinnings and background literature to drive the an efficient manner, the bank deploys various resources
research hypotheses in Section 2. Followed by a descrip- such as buildings, financial capital, technologies, people,
tion on data and research variables in Section 3. Section 4 and skills. The handling of all the different resources
presents the empirical analysis and discussion while within the process of producing goods and/or offering
Section 5 presents the concluding remarks. services empowers a bank with superior resources, which
separates it from other business rivals (Richard, 2000).
Accordingly, we argue that a sustainable competitive
2 | B ACKGROUND AND advantage for a bank is created by the uniqueness of
HYPOTHESE S advantageous resources owned by the bank and expect a
direct significant impact of organizational resources i.e.
2.1 | Theoretical background intellectual capital base on performance outcomes.

2.1.1 | Resource-based view of the firm

2.1.2 | The agency perspective
In today's knowledge economy, banks face an increasing
competition from their rivals. The resource-based view A vast majority of the public listed companies have an
explains how financial institutions can gain competitive organizational framework in which there is a clear
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
NAWAZ AND OHLROGGE 3811

separation of ownership and control between principals 2.2 | Intellectual capital efficiency and
and agents. The organization's owners (principals) hire performance
employees or managers (agents) to act on their behalf and
run the day-to-day business operations in principals' inter- 2.2.1 | Value added intellectual coefficient
est. Agency theory (Fama & Jensen, 1983) address the (VAIC) and financial performance
principal-agent phenomenon and explains the underlying
complications. The theory assumes that there is a discrep- As argued earlier, corporations are increasingly reliant on
ancy of interests between agents and shareholders (princi- knowledge and experience, which constitutes IC, also
pals). Agents are analytical but diplomatic. Additionally, referred to as the intangible assets, rather than pure finan-
the theory argues that agents tend to diverge to focus on cial assets to create value. An increasing number of studies
personal gains rather than shareholders' wealth maximiza- pay attention to IC in the financial services sector (Joshi
tion thus violating the agency contract in the process. Man- et al., 2013; Nawaz & Haniffa, 2017) and conclude that
agers (the agents) are hired, with promised rewards, by the banking organizations need both physical and IC/intangible
principal to run the organization in all conscience. There- resources to create value (Nawaz et al., 2020).
fore, the overall performance depends on the readiness to Empirical studies that have employed VAIC method-
assume risks and efforts of the agents. The principal is at a ology developed by Pulic (2000), report a significant posi-
disadvantage within this relationship because the agent's tive relationship between IC efficiency and financial
actions are not fully comprehensible or transparent to the performance (see Nawaz et al., 2020 for a recent litera-
principal. This leads to an information asymmetry between ture analysis especially, on the banking sector). However,
shareholders (principal) and manager (agent), which is the relationship between IC efficiency and banks' perfor-
problematic for the principal to validate the legitimacy of mance has been relatively unexplored in a longitudinal
the benefits to the managers. For this reason, the principal manner.
is responsible to erect separate monitoring mechanisms to Resource-based view of the firm holds that an organi-
control agents' actions and to achieve overall transparency. zation appraises the soundness of its resources before
The imbalance on information between principal and the selecting an executable strategy. Since IC resources drive
agent leads to adverse selection. As the principals do not an organization's capability to innovate, we argue that
have the same access to organizational information as the impact of IC resources will be more pertinent in a
agents do, they are not able to evaluate agents' perfor- longitudinal study. Therefore, our first hypothesis, based
mance and cannot fully comprehend their achievements on the financial performance is as follows:
appropriately. Such lack of knowledge leads to the moral
hazard and agency problems (Jensen & Meckling, 1976). Hypothesis 1. there is a significant positive
This phenomenon describes the circumstance of relationship between VAIC and financial per-
agents, which are not carrying out their duties in the most formance of Deutsche Bank.
favourable manner for the principal. This hinders the
principal to reward agents fairly. Because of that, a mea- In order to fully understand the impact of VAIC on
surement system, which helps to evaluate managers, is of performance, it is imperative to consider the segregate
higher importance to the principal. Arguably, principals impact of the sub-components of IC viz. human capital
and agents need to come across with a trade-off between efficiency (HCE), structural capital efficiency (SCE) and
incentives and risk sharing. The incentive represents a capital employed efficiency (CEE). An analysis of sub-
motivational impulse for agents to deliver adequate perfor- components will provide clearer evidence on which capi-
mance. The risk sharing is an important factor for the tal resources contribute and matter most to corporate
agent as it is directly tied to the reward for their services. performance outcomes.
It is clear from the arguments presented above that corpo-
rate governance attributes such as board size, CEO-dual-
ity, and the proportion of non-executive directors have 2.2.2 | Human capital efficiency (HCE) and
direct implications on performance outcomes. An effective financial performance
governance mechanism is therefore necessary to monitor
and direct the agents to work in the best interest of the Human capital efficiency refers to the value added by
principal, thereby, achieving required performance out- human resources stocks of an organization. Previous
comes while maintaining competitive advantage over the studies have suggested a significant relationship
competitors in the market (Fama & Jensen, 1983). Accord- between human capital efficiency and financial perfor-
ingly, we sought to analysis the impact of governance mance of an organization (see Goh, 2005; Nawaz, 2019).
mechanisms on performance outcomes of Deutsche Bank. Goh (2005) observe that financial performance of
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
3812 NAWAZ AND OHLROGGE

Malaysian banks is mainly driven by human capital effi- found a positive and statistically significant relationship
ciency than by structural capital efficiency and capital between CEE and firm performance. In support, earlier
employed efficiency. Joshi et al. (2013) investigated the research (e.g., Joshi et al., 2013) report a positive impact
intellectual capital performance within the Australian of CEE on organizational performance. Employed capi-
financial sector from 2006 to 2008 and reported that the tal and its efficiency will have direct implications for
examined banks had a higher human capital efficiency larger banks such as the Deutsche Bank in focus. Given
than structural capital and capital employed efficiencies. its historical background in the field of financial services;
In conclusion, the empirical studies agree that human we expect the bank to utilize its financial capital
capital is strongly related to financial performance of resources to maintain profitability. Accordingly, we
banks. For Deutsche Bank human capital is of utmost expect a positive relationship between CEE and financial
importance as the bank facing continuous challenges in performance:
both internal and external markets and is fighting for its
survival. The bank could potentially rely on its stock of Hypothesis 1.3. there is a significant posi-
human capital to maintain its position including its per- tive relationship between capital employed
formance efficiency. The resource-based view of the efficiency and financial performance of
firm thus give support to the following hypothesis: Deutsche Bank.

Hypothesis 1.1. there is a significant positive

relationship between human capital efficiency 2.3 | Corporate governance mechanisms
and financial performance of Deutsche Bank. and performance

Agency problem can be mitigated by erecting certain cor-

porate governance mechanisms, which align the interests
2.2.3 | Structural capital efficiency (SCE) of managers (agents) to those of the owners/principals
and financial performance (Fama & Jensen, 1983). Empirical studies have consid-
ered the impact of several governance mechanisms on
Nawaz (2019) contend that human capital cannot work corporate performance outcomes. Accordingly, we
alone and requires some sort of supporting mechanism in include several corporate governance attributes in our
the form of structural/organizational capital. Structural capi- analysis.
tal thus works as a supporting mechanism for human and
other capital resources within the firm to increase the over-
all efficiency of the organizational resources. This is espe- 2.3.1 | Board size and financial performance
cially the case for banking and finance organizations
(Nawaz et al., 2020; Nawaz & Haniffa, 2017). Earlier Board of directors have several functions. Their respon-
research however has produced mixed results as to direction sibilities range from setting corporate vision, mission,
of the relationship between structural capital efficiency and and values to providing strategic directions for the
performance (e.g., see Goh, 2005). The mixed results call for managers while monitoring their actions to safeguard
further investigation. For that reason and consistent with the interests of the shareholders. Corporate board
the aims and objectives of this study, we analyse the impact advises the CEO about strategic plans and strives to
of structural capital efficiency on the financial performance maintain maximum level of transparency for outsiders
of Deutsche Bank without predefining the direction of the (Jensen, 1993). Most literature recommends smaller
relationship: boards to be more preferable, because they seem to be
more productive and be able to monitor the organiza-
Hypothesis 1.2. there is a significant rela- tion in a more effective way as opposed to larger
tionship between structural capital efficiency boards, who are not critical to conflicts due to social
and financial performance of Deutsche Bank. loafing and therefore are less productive.
On the other hand, empirical studies that found a sig-
nificant positive relationship between board size and
2.2.4 | Capital employed efficiency (CEE) financial performance argue that a larger board size is
and financial performance more advantageous. Nevertheless, Jensen (1993) rec-
ommended that the board size should not exceed eight
The final sub-component of VAIC is the capital members, as this size can be seen as ideal due to group
employed efficiency (CEE). Several empirical studies dynamics. Given that, the sampled bank operates across
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
NAWAZ AND OHLROGGE 3813

borders and given the nature and extent of its business 2.3.4 | CEO tenure and financial
and operational complexity, the bank may benefit from a performance
larger board.
Closely related to CEO role duality is CEO tenure. Longer
Hypothesis 2.1. there is a significant posi- serving CEOs may exploit their organizational knowledge to
tive relationship between board size and linger on to their position i.e. top executive of the organiza-
financial performance of Deutsche Bank. tion. We thus, argue that longer serving CEO may spend
more time on firm politics rather than focusing on organiza-
tional performance. Therefore, we expect a negative relation-
2.3.2 | Board diversity and financial ship between CEO role duality and financial performance:
performance
Hypothesis 2.4. there is a significant nega-
Board composition in terms of diversity, largely refers tive relationship between CEO-tenure and
to as board gender diversity i.e. fraction of female financial performance of Deutsche Bank.
board of directors to board size, is one of the key cor-
nerstone is explaining firm performance (Nawaz, 2021).
Corporate governance literature advises to take female 2.4 | Control variables
directors on board, because this reduces the risk of pos-
sible disagreements regarding the interests of share- Thus far, we have argued for the significance of board-level
holders, thereby, supporting the idea of increased corporate governance variables in relation to financial per-
representation of diversified directors on the board formance of Deutsche Bank. Earlier research suggests that
(see, De Cabo et al., 2012). Accounting for this ten- CEO traits have direct implications for corporate outcomes
dency, we expect the board gender diversity i.e. higher (for further analysis, see, Hambrick & Quigley, 2014;
fraction of female directors on the board to improve Nawaz, 2021, among others). Accordingly, we control for
bank performance: additional agent attributes that could influence corporate
outcomes. Essentially, we profile each of the CEOs who
Hypothesis 2.2. there is a significant positive served at Deutsche Bank over the past six decades to build
relationship between board gender diversity a unique dataset, which measures the impact of CEO attri-
and financial performance of Deutsche Bank. butes viz. CEO age, CEO education (level and quality), CEO
financial expertise, and experience on financial perfor-
mance. Similarly, the above cited studies suggest that firm-
2.3.3 | Former-CEO role duality and specific attributes such as size and leverage potentially
financial performance impact the organizational outcomes. Accordingly, we con-
trol for these variables in our analysis.
CEO role-duality refers to the state when CEO simulta-
neously assumes the role of the board's chairperson.
Jensen (1993) argues that CEO duality may weaken 3 | DATA AND A NALYSIS
board of directors as the CEO assumes more power
and with the potential to influence board and execu- 3.1 | Deutsche Bank
tives alike. Although, role duality was not detected
within the annual reports of Deutsche Bank, the Deutsche Bank was founded in Berlin in 1870 with an
authors recognize that at Deutsche Bank the former annual turnover of €1.59 billion, it is the largest German
CEO frequently served the role of the chairperson. bank existing. Deutsche Bank is organized into three
With this background, we speculate that being the for- divisional business segments, which are Corporate and
mer CEO, the position holder may still be influential Investment Bank (CIB), Private and Commercial Bank
for the board due to long-term personal relationships (PCB) and Deutsche Asset Management (DAM).
with board members. We put this relationship to an Deutsche Bank has made few headlines lately as the
empirical test: bank received fines from the US financial regulator 1.9
billion USD in December 2013 and 725 million USD, 157
Hypothesis 2.3. there is a significant rela- million USD in April 2017 and 41 million USD in May
tionship between former-CEO-duality and 2017 (Hamilton & Arons, 2017). While the ongoing legal
financial performance of Deutsche Bank. battles are costly for the bank, they are also causing huge
 3814

TABLE 1 Descriptive statistics and correlation matrix

Mean SD Min. Max. VIF 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1. ROA 0.072 0.059 ‑0.127 0.309 1.000

2. ROE 0.003 0.002 ‑0.004 0.015 0.6762
3. VAIC 2.289 0.643 ‑0.897 2.922 4.26 0.4222 0.4919
4. HCE 1.436 0.265 0.402 1.806 3.41 0.449 0.344 0.3382
5. SCE 0.257 0.291 ‑1.485 0.446 3.57 0.3847 0.3405 0.2567 0.3812
6. CEE 0.596 0.163 0.137 0.941 2.08 0.573 0.2866 0.2138 0.3041 0.2584
7. Board-size 3 0.313 3 4 4.09 ‑0.064 0.0231 0.1954 0.2322 0.1055 0.2053
8. Board-diversity 0.127 0.114 0 0.381 2.43 0.1257 0.2918 0.3996 0.1237 0.3267 0.3053 0.2142
9. CEO-duality 0.35 0.481 0 1 6.26 ‑0.3159 ‑0.1581 ‑0.2429 ‑0.1679 ‑0.2472 ‑0.2442 0.1323 0.2047
10. CEO-tenure 7 2.504 2 9 2.56 ‑0.0504 ‑0.2368 ‑0.2818 ‑0.2853 ‑0.2131 ‑0.268 ‑0.3156 ‑0.3229 ‑0.0421
11. CEO-age 58 3.686 49 65 3.15 0.3096 0.2165 0.2608 0.1942 0.1905 0.173 0.1781 0.3655 ‑0.0565 ‑0.1878
12. CEO-education 0.717 0.454 0 1 2.77 ‑0.0271 ‑0.041 ‑0.2912 ‑0.3231 ‑0.2571 ‑0.0029 ‑0.1747 ‑0.305 ‑0.3141 0.1552 ‑0.1398
13. Education-quality 0.25 0.437 0 1 4.21 ‑0.2613 ‑0.5015 ‑0.4568 ‑0.4609 ‑0.4199 ‑0.3042 ‑0.1895 ‑0.6248 0.3833 0.4267 ‑0.2677 0.163
14. CEO-FINEX 0.917 0.279 0 1 3.12 ‑0.0082 ‑0.1324 ‑0.11 ‑0.2467 ‑0.1357 0.2088 0.1387 0.0968 0.2212 0.2825 0.0959 ‑0.1896 0.1741
15. CEO-experience 26 6.307 13 38 4.59 ‑0.0151 0.1765 0.2998 0.3334 0.2236 0.2417 0.1948 0.1929 0.243 ‑0.6015 ‑0.0424 ‑0.2132 ‑0.2919 ‑0.2386
16. Bank-size 11.054 0.886 9.631 12.343 5.72 ‑0.126 ‑0.3791 ‑0.4234 ‑0.3848 ‑0.3489 ‑0.4226 ‑0.1527 ‑0.2156 ‑0.0258 0.3548 ‑0.4392 0.4211 0.2312 0.0368 ‑0.3912
17. Leverage 4.309 0.083 4.209 4.499 3.53 ‑0.2792 ‑0.3081 ‑0.3317 ‑0.4778 ‑0.4274 ‑0.3584 ‑0.4282 ‑0.3795 0.2111 0.4019 ‑0.3539 0.3994 0.2386 0.0245 ‑0.3443 0.4372

Note: Table 1 provides descriptive statistics, correlations matrix as well as results for the variance inflation factors (VIFs) to test for all regressions to check for multicollinearity. Table 1 also provides the definitions of research
variables used in this study. Dependent variables: Return on Assets (ROA) and return on Equity (ROE) are our main dependent variables, which are the ratio of net income to average total assets, and net income to shareholder's
equity, respectively. Independent variables: VAIC is the value added intellectual coefficient, a composite sum of HCE + SCE + CEE. HCE is human capital efficiency. SCE is structural capital efficiency. CEE is capital employed
efficiency. Board attributes: Board-size is the natural logarithm of total number of directors serving on the board. Board-diversity is the ratio of female board of directors to total board size. Former CEO-duality takes the value of one
if the current board chair served as CEO of bank previously, and zero otherwise. Agent heterogeneity: CEO-tenure and CEO-age are computed in years. CEO-education is a dummy variable which is coded one if the CEO holds a
college degree, and zero otherwise. Education quality is a dummy variable which is coded one if the CEO graduated from top100 universities, and zero otherwise. CEO-expert (CEO-FINEX) is a dummy variable which is coded one if
the CEO graduated with a degree in finance, and zero otherwise. CEO-experience is computed in years. Firm-level controls: Bank-size is the log of total assets and leverage is total debt to total equity ratio. Variables significant at
p < 0.05 and p < 0.01 are in bold.
NAWAZ AND OHLROGGE

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NAWAZ AND OHLROGGE 3815

reputational damage to Deutsche Bank's reputation. In Similarly, the average board-size is 3 with 13 percent
addition, Deutsche Bank share price seems to be in an gender diversity ratio while 35% of the CEOs included in
unstoppable downswing since the economic crisis in our sample later on took the board's chairperson role and
2007–09. In 2006, Deutsche Bank's share price reached its the average CEO tenure is around 7 years. Turning to the
top level at 91€. In September 2017, the share price was CEO-related control variables, it can be seen that the
13.42€, which indicates the tough time for the organiza- average age of the CEO is over 58 years with over 70% of
tion and in September 2020 the share price stood just the CEOs with college degree, including 25% who gradu-
under 8€ per share. Nevertheless, the Deutsche Bank was ated from top100 universities. Majority of the CEOs are
a very successful bank for many years in its history and finance graduates with an average working experience of
became one of the most successful and largest banks in 25 years with minimum and maximum values of 13 and
the world. For this reason, and for the reason that no lit- 38 years. Finally, the average values for bank-size and
erature has been published on the impact of intellectual leverage during the study period are 11.05 and 4.31,
capital on the financial performance of a German bank, respectively.
the Deutsche Bank is selected for further investigation. We also run the Variance Inflation Factors (VIFs) test
Another reason for choosing Deutsche Bank is its higher for all regressions to check for multicollinearity. Results
amounts of fines in recent year as discussed above. reported in column 6 show no problems of multicollinearity
Therefore, the corporate governance structure of between the independent variables. The average VIF score
Deutsche Bank seems to be a reasonable topic for further is 3.72 with maximum and minimum values of 6.26 and
investigation as well and will be linked to the financial 2.08, respectively.
performance of the bank.

4 | E M P I R I C A L AN A L Y S IS AN D
3.2 | Data DISCUSSIONS

This is a longitudinal study on Deutsche Bank. With this 4.1 | Econometrics specification
aim in mind, we started collecting financial and corpo-
rate governance data. We wanted to include the maxi- We used the following model to test our research
mum number of firm year observations. We were able to hypotheses.
stretch our sample period over six decades. We extract
data from bank's annual reports, quarterly reports, press Financial performance ¼ α þ β1 IC þ β2 CG þ γControl þ ε
releases, newspaper articles, bank's website, individual
CEO's personal or company websites (where applicable), where financial performance is the proxy for the perfor-
and other publically available, independently verifiable, mance (captured using financial ratios, ROA and ROE),
resources. We dropped observations where we were variable IC is the matrix of intellectual capital efficiency,
unable to verify the collected data from at least two inde- variable CG is the matrix of corporate governance mecha-
pendent sources. Our final sample consists of sixty-two nisms (i.e. board size, board diversity, CEO duality and
firm-year observations, covering the 1957–2019 period. CEO tenure), Control is a matrix of CEO-traits and bank-
Table 1 provides definitions of variables. specific characteristics Ɛ is the error term, α is the con-
stant, and β and γ are the vectors of coefficient estimates.
We use this model to analyse the effects of (i) intellectual
3.3 | Descriptive statistics and capital efficiency (VAIC, HCE, SCE and CEE) and corpo-
correlation matrix rate governance attributes on financial performance of
Deutsche Bank.
Table 1 presents the descriptive statistics and correction
matrix for all the variables included in this study. Our
main dependent variables return on assets (ROA) and 4.2 | The impact of intellectual capital
return on equity (ROE) have mean values of 0.072 and on financial performance measured
0.003, indicating the financial performance trends at by ROA
Deutsche Bank during the study period. As for the con-
tinuous independent variables, the mean for VAIC,1 We analyse the impact of intellectual capital measure by
HCE, SCE, and CEE are 2.28, 1.44, 0.26, and 0.59, respec- VAIC on financial performance measured by return on
tively. Figure 1 illustrates trends in intellectual capital assets (ROA), using the econometric model defined
efficiency proxied by VAIC and financial performance above. Results reported in Table 2 show a statistically sig-
computed by ROA during the study period (1957–2019). nificant, at the 1% level, positive relationship between IC
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
3816 NAWAZ AND OHLROGGE

F I G U R E 1 Trends in IC efficiency (VAIC) and financial performance (ROA) during the study period (1957–2019) [Colour figure can be
viewed at wileyonlinelibrary.com]

efficiency and ROA. These results are consistent with the column 7 suggest a statistically significant, negative, rela-
earlier studies (e.g., Goh, 2005; Nawaz & Haniffa, 2017, tionship, at the 1% level, implying that when a former
among others). The relationship remains statistically sig- CEO leads a relatively larger board, bank's financial per-
nificant across models. Therefore, we accept our first formance suffers. The relationship turns positive when
research hypothesis (H1). These results suggest that we interact board-size and board diversity (Board-
Deutsche Bank is efficient in using its intellectual capital size*Board-diversity) but our results remain statistically
resources to generate higher profitability during the study insignificant. Nonetheless, the latter results suggest that
period. board diversity may correct corporate board's direction in
Next, we introduce the corporate governance related monitoring the agents.
variables in our regression equation. Results reported in
columns 3, 4, and 5 suggest that board-size and CEO role
duality relate negatively, at the 10% level, with ROA. 4.3 | The impact of intellectual capital
Thus, we reject hypothesis (H2.1) with weak statistical sig- on financial performance measured
nificance that larger board size may improve financial by ROE
performance. The latter results i.e. hypothesis (H2.3) sug-
gest that when a former CEO leads the board, financial We repeat the same analysis by changing our main
performance suffers. Our analysis further suggests that dependent variable, financial performance measure
higher fraction of female board of directors improve from return on assets (ROA) to return on equity (ROE).
financial performance. The statistically significant rela- Results reported in Table 3 are consistent with those
tionship, at the 5% level, provides support for observed in Table 2 for the alternative proxy. These
hypothesis (H2.2). Our results add to the ongoing debate results are largely consistent with varying degrees statis-
on board room gender diversity (e.g., De Cabo tical support for certain variables however, they add
et al., 2012). We do not find any statistical support to further value to our findings and strengthen our
accept or reject hypothesis (H2.4). arguments.
Surprisingly, none of the CEO-related control vari-
ables i.e. CEO age, education level and quality, financial
expertise, and CEO experience explains financial perfor- 4.4 | The impact of intellectual capital
mance. As for the bank-specific control variables, we find (IC) and IC sub-components (human,
that bank size (positively) and leverage (negatively) relate structural and capital employed efficiency)
with financial performance (ROA). on financial performance
To supplement the observed results, we run further
regressions with interaction variables. We regress the In Table 4, we report results for the impact of intellec-
joint impact of board-size and former-CEO role duality tual capital and IC sub-components (human, structural
(Board-size*CEO-duality) on ROA. Results reported in and capital employed efficiency) on alternative financial
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
NAWAZ AND OHLROGGE 3817

TABLE 2 The impact of intellectual capital (VAIC) on financial performance measured by ROA

Dependent variable: Return on assets (ROA)

(1) (2) (3) (4) (5) (6) (7) (8)

VAIC 0.00151*** 0.00156*** 0.00169*** 0.00168*** 0.00167*** 0.00178*** 0.00187*** 0.00189***
(7.472) (6.251) (6.513) (5.909) (5.895) (5.032) (5.112) (4.952)
Board-size (Ln) ‑0.00124* ‑0.000943 ‑0.000479 ‑0.000476 0.000375 0.0150*** 0.0145***
(‑1.998) (‑1.337) (‑0.592) (‑0.584) (0.553) (2.953) (3.214)
Board-diversity 0.0159** 0.0162** 0.0162** 0.0163** 0.0934*** 0.0954**
(2.018) (2.038) (2.016) (2.482) (2.869) (2.610)
CEO-duality ‑0.000541* ‑0.000540* ‑0.000424 ‑0.000252 ‑0.00418
(‑1.368) (‑1.406) (‑0.550) (‑0.326) (‑0.453)
CEO-tenure (Ln) ‑0.000192 ‑8.962105 ‑0.000252 ‑0.000277
(‑0.497) (‑0.144) (‑0.436) (‑0.487)
CEO-age (Ln) 0.00411 0.00428 0.00384
(0.476) (0.493) (0.469)
CEO-education 0.000517 0.000158 0.000308
(1.086) (0.301) (0.519)
Education-quality ‑0.000507 ‑0.000593 ‑0.000510
(‑0.179) (‑0.210) (‑0.188)
CEO-FINEX ‑0.00107 ‑0.000673 ‑0.000853
(‑0.425) (‑0.262) (‑0.367)
CEO-experience (Ln) ‑0.0128 ‑0.00662 ‑0.0114
(‑0.280) (‑0.142) (‑0.285)
Board-size*CEO-duality ‑0.0242*** ‑0.0248**
(‑2.821) (‑2.556)
Board-size*Board-diversity 0.00125
(0.432)
Bank-size (Ln) 0.00157 0.000997 0.00144 0.00111 0.00118 0.000624 0.000737 0.000700
(1.257) (0.687) (0.945) (0.713) (0.761) (0.334) (0.393) (0.384)
Leverage ‑0.0247** ‑0.0208 ‑0.0161 ‑0.0114 ‑0.0116 ‑0.00390 ‑0.00348 ‑0.00381
(‑2.166) (‑1.631) (‑1.588) (‑1.043) (‑1.074) (‑0.273) (‑0.244) (‑0.270)
Year dummy Included Included Included Included Included Included Included Included
Constant 0.0891** 0.0824** 0.0464* 0.0282 0.0289 ‑0.0135 ‑0.0655 ‑0.0592
(2.489) (2.161) (1.919) (1.007) (1.048) (‑0.112) (‑0.502) (‑0.485)
2
Adj. R 0.408 0.413 0.507 0.502 0.493 0.476 0.487 0.478

Note: Table 2 provides results for the regression analysis, analysing the effects of intellectual capital on financial performance: return on assets (ROA). The
econometric analysis is conducted to test research hypotheses (H1, H2.1, H2.2, H2.3, and H2.4). Table 1 provides definitions for all variables. Robust t-statistics in
parentheses.
***p < 0.01. **p < 0.05. *p < 0.1.

performance proxies namely, return on assets (ROA) in Model 2, Model 2a, Model 2b, and Model 2c,
Panel A and return on equity (ROE) in Panel B. We respectively.
use the same econometric equation to extract results for IC and its sub-components viz. human capital effi-
Model 1, Model 1a, Model 1b, and Model 1c with ROA ciency (HCE), structural capital efficiency (SCE), and
as the dependent variable. We repeat our analysis with capital employed efficiency (CEE), all relate positively
ROE as the dependent variable to extract results for with both the financial measure proxies, ROA, and
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
3818 NAWAZ AND OHLROGGE

TABLE 3 The impact of intellectual capital (VAIC) on financial performance measured by ROE

Dependent variable: Return on equity (ROE)

(1) (2) (3) (4) (5) (6) (7) (8)

VAIC 0.0668*** 0.0676*** 0.0704*** 0.0704*** 0.0710*** 0.0738*** 0.0754*** 0.0755***
(11.73) (11.82) (12.90) (12.78) (12.70) (11.68) (11.24) (10.61)
Board-size (Ln) ‑0.0179 ‑0.0114 ‑0.0131 ‑0.0133 ‑0.00267 0.285** 0.282***
(‑1.382) (‑0.771) (‑0.690) (‑0.707) (‑0.143) (2.526) (2.696)
Board-diversity 0.346** 0.345** 0.345** 0.327** 1.849** 1.862**
(2.447) (2.414) (2.406) (2.679) (2.652) (2.482)
CEO-duality ‑0.00202 0.00197 ‑0.0111 ‑0.00768 ‑0.0346
(‑0.184) (0.177) (‑0.552) (‑0.386) (‑0.181)
CEO-tenure (Ln) 0.00967 0.00478 0.00158 0.00140
(1.163) (0.371) (0.131) (0.117)
CEO-age (Ln) 0.164 0.168 0.165
(0.956) (0.957) (0.959)
CEO-education 0.00363 ‑0.00344 ‑0.00242
(0.316) (‑0.254) (‑0.157)
Education-quality 0.0112 0.00951 0.0101
(0.209) (0.178) (0.194)
CEO-FINEX 0.00278 0.0107 0.00945
(0.0589) (0.224) (0.215)
CEO-experience (Ln) ‑0.154 ‑0.0323 ‑0.0651
(‑0.177) (‑0.0363) (‑0.0808)
Board-size*BEO-duality ‑0.478** ‑0.482**
(‑2.426) (‑2.295)
Board-size*Board-diversity 0.00855
(0.143)
Bank-size (Ln) 0.0442* 0.0359 0.0455 0.0467 0.0432 0.0215 0.0237 0.0235
(1.937) (1.349) (1.652) (1.669) (1.550) (0.611) (0.675) (0.684)
Leverage ‑0.365* ‑0.308 ‑0.207 ‑0.224 ‑0.211 0.0390 0.0473 0.0451
(‑1.733) (‑1.320) (‑1.065) (‑1.080) (‑1.015) (0.124) (0.150) (0.142)
Year dummy Included Included Included Included Included Included Included Included
Constant 1.004 0.906 0.126 0.194 0.156 ‑1.324 ‑2.350 ‑2.307
(1.491) (1.280) (0.244) (0.323) (0.259) (‑0.551) (‑0.910) (‑0.921)
2
Adj. R 0.565 0.563 0.643 0.637 0.633 0.625 0.632 0.624

Note: Table 3 provides results for the regression analysis, analysing the effects of intellectual capital on financial performance: return on equity (ROE). The
econometric analysis is conducted as an early robustness test with an alternative proxy for firm performance, namely ROE. Table 1 provides definitions for all
variablesRobust t-statistics in parentheses.
***p < 0.01. **p < 0.05. *p < 0.1.

ROE with varying degrees of statistical significance. 4.5 | Further analysis

Thus, we accept hypotheses (H1.1, H1.2, and H1.3). Our
results suggest that human capital and capital employed Financial sector, banks with complexed business models
mainly drive IC efficiency, relative to structural such as the Deutsche Bank, in particular, has received
capital. These findings add to the earlier literature increased scrutiny from stakeholders following the finan-
(e.g., Joshi et al., 2013; Nawaz et al., 2020; Nawaz & cial crisis, which had affected bank performance. As
Haniffa, 2017). mentioned earlier in Section 3.1, Deutsche Bank has also
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
NAWAZ AND OHLROGGE 3819

T A B L E 4 The impact of intellectual capital (IC) and IC sub-components (human, structural and capital employed efficiency) on
financial performance

Panel A: Dependent variable, ROA Panel B: Dependent variable, ROE

Model 1 Model 1a Model 1b Model 1c Model 2 Model 2a Model 2b Model 2c

VAIC 0.0738*** 0.00178***
(11.68) (5.032)
HCE 0.191** 0.00494***
(8.399) (5.355)
SCE 0.140** 0.00334**
(9.578) (4.500)
CEE 0.281*** 0.00572**
(2.977) (2.141)
Board-size (Ln) ‑0.00267 ‑0.00508 ‑0.000946 ‑0.0164 0.000375 0.000348 0.000409 1.722105
(‑0.143) (‑0.257) (‑0.0467) (‑0.654) (0.553) (0.488) (0.602) (0.0224)
Board-diversity 0.327** 0.353*** 0.294** 0.298** 0.0163** 0.0171** 0.0155** 0.0154**
(2.679) (2.997) (2.390) (2.030) (2.482) (2.639) (2.363) (2.260)
CEO-duality ‑0.0111 ‑0.0247 ‑0.00974 ‑0.0104 ‑0.000424 ‑0.000733 ‑0.000400 ‑0.000507
(‑0.552) (‑1.460) (‑0.367) (‑0.395) (‑0.550) (‑1.044) (‑0.463) (‑0.544)
CEO-tenure (Ln) 0.00478 0.00378 0.000898 0.0128 ‑8.960105 ‑0.000112 ‑0.000183 6.541205
(0.371) (0.287) (0.0730) (0.776) (‑0.144) (‑0.182) (‑0.300) (0.100)
CEO-age (Ln) 0.164 0.234 0.203 0.0822 0.00411 0.00565 0.00508 0.00300
(0.956) (1.520) (1.014) (0.383) (0.476) (0.702) (0.560) (0.290)
CEO-education 0.00363 0.0220 0.00187 ‑0.0410** 0.000517 0.00105* 0.000464 ‑0.000511
(0.316) (1.478) (0.149) (‑2.527) (1.086) (1.738) (0.949) (‑1.014)
Education-quality 0.0112 0.0189 0.0251 ‑0.0213 ‑0.000507 ‑0.000324 ‑0.000172 ‑0.00113
(0.209) (0.369) (0.442) (‑0.344) (‑0.179) (‑0.118) (‑0.0600) (‑0.400)
CEO-FINEX 0.00278 0.0456 0.0134 ‑0.0662 ‑0.00107 ‑2.853206 ‑0.000812 ‑0.00239
(0.0589) (0.984) (0.269) (‑1.030) (‑0.425) (‑0.00114) (‑0.315) (‑0.762)
CEO-experience (Ln) ‑0.154 0.0452 0.180 ‑0.423 ‑0.0128 ‑0.00943 ‑0.00447 ‑0.0143
(‑0.177) (0.0569) (0.197) (‑0.374) (‑0.280) (‑0.219) (‑0.0962) (‑0.257)
Bank-size (Ln) 0.0215 0.0137 0.0542 ‑0.00153 0.000624 0.000341 0.00142 0.000335
(0.611) (0.412) (1.476) (‑0.0273) (0.334) (0.198) (0.759) (0.143)
Leverage 0.0390 0.121 ‑0.370 0.380 ‑0.00390 ‑0.000852 ‑0.0138 0.000968
(0.124) (0.411) (‑0.943) (0.692) (‑0.273) (‑0.0647) (‑0.914) (0.0663)
Year dummy Included Included Included Included Included Included Included Included
Constant ‑1.324 ‑2.094 ‑0.0436 ‑1.970 ‑0.0135 ‑0.0355 0.0174 ‑0.0221
(‑0.551) (‑0.946) (‑0.0157) (‑0.672) (‑0.112) (‑0.306) (0.138) (‑0.182)
Adj. R2 0.625 0.630 0.575 0.390 0.476 0.502 0.456 0.376

Note: Table 4 provides results for the regression analysis, analysing the effects of IC sub-components on financial performance: ROA (panel A) and ROE (panel
B). The econometric analysis is conducted to test research hypotheses (H1.1, H1.2, and H1.3). Table 1 Provides definitions for all variables. Robust t-statistics in
parentheses.
***p < 0.01. **p < 0.05. *p < 0.1.

been in the spotlight due to some of the irregularities impact on Deutsche Bank's market valuation.
which led to huge financial penalties against the bank in Nawaz (2019) highlights the significance of organiza-
addition to reputational damages which had a direct tional resources during the economic malaise and reports
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
3820 NAWAZ AND OHLROGGE

TABLE 5 The impact of intellectual capital (IC) and IC sub-components on financial performance: stable period vis-à-vis economic
malaise

Dependent variable: Return on assets (ROA)

Panel A: Stable period Economic malaise

(1) (2) (3) (4) (1) (2) (3) (4)

VAIC 0.00317*** 0.00165**
(4.182) (2.517)
HCE 0.00410** 0.00595***
(2.578) (2.985)
SCE 0.00905** 0.00275*
(2.677) (2.360)
CEE 0.00376 0.00967
(1.262) (1.667)
Board-size (Ln) ‑0.000290 ‑0.000132 ‑9.952105 0.000471 ‑0.00381 ‑0.00101 ‑0.00453 ‑0.00734
(‑0.452) (‑0.188) (‑0.143) (0.671) (‑0.586) (‑0.196) (‑0.640) (‑1.069)
Board-diversity 0.00568 0.00758* 0.00774* 0.00936 0.0200 0.0202 0.0230 0.0130
(1.248) (1.746) (1.792) (1.681) (0.901) (1.095) (0.967) (0.465)
CEO-duality ‑0.00118 ‑0.00116 ‑0.00119 ‑0.000825 0.00271 0.00158 0.00333 0.00249
(‑1.342) (‑1.279) (‑1.307) (‑0.937) (0.584) (0.352) (0.717) (0.511)
CEO-tenure (Ln) ‑0.000543 ‑0.000571 ‑0.000602 ‑0.000428 0.000402 ‑0.000195 0.00253 ‑0.00398
(‑1.278) (‑1.311) (‑1.402) (‑0.947) (0.0487) (‑0.0304) (0.290) (‑0.316)
CEO-age (Ln) ‑0.00362 0.000456 0.000165 ‑0.000654 ‑0.0163 ‑0.0167 ‑0.0187 ‑0.00953
(‑0.547) (0.0666) (0.0242) (‑0.0877) (‑0.544) (‑0.578) (‑0.610) (‑0.255)
CEO-education ‑0.000172 0.000292 0.000269 ‑0.000172 0.00437 0.00624 0.00466 0.000599
(‑0.315) (0.537) (0.484) (‑0.256) (0.628) (0.909) (0.672) (0.0625)
Education-quality ‑0.00532 ‑0.00451 ‑0.00443 ‑0.00908 0.00369** 0.00315** 0.00318** 0.00195
(‑0.931) (‑0.828) (‑0.780) (‑1.099) (2.749) (2.126) (2.136) (1.402)
CEO-FINEX ‑0.00389*** ‑0.00221* ‑0.00230* ‑0.00350* ‑0.00331 ‑0.00177 ‑0.002 ‑0.00248
(‑3.075) (‑1.745) (‑1.826) (‑1.776) (‑1.013) (‑0.365) (‑1.226) (‑0.736)
CEO-experience (Ln) ‑0.0607** ‑0.0396 ‑0.0397 ‑0.0378 ‑0.117 ‑0.132 ‑0.144 ‑0.0254
(‑2.555) (‑1.479) (‑1.515) (‑1.354) (‑0.441) (‑0.506) (‑0.559) (‑0.0640)
Bank-size (Ln) ‑0.000459 ‑0.000442 ‑0.000413 ‑0.000928 0.00324 0.00235 0.00268 0.00555
(‑0.354) (‑0.278) (‑0.261) (‑0.647) (0.561) (0.449) (0.461) (0.637)
Leverage ‑0.0377 ‑0.0259 ‑0.0264 ‑0.00992 ‑0.0316 ‑0.0239 ‑0.0442 ‑0.00348
(‑1.599) (‑1.079) (‑1.082) (‑0.377) (‑1.022) (‑0.775) (‑1.456) (‑0.0926)
Year dummy Included Included Included Included Included Included Included Included
Constant 0.198* 0.123 0.129 0.0653 0.198 0.166 0.275 0.0203
(1.874) (1.206) (1.252) (0.536) (0.631) (0.561) (0.869) (0.0459)
2
Adj. R 0.521 0.456 0.462 0.388 0.227 0.302 0.196 0.156

Note: This provides results for the regression analysis, analysing the effects of IC and its sub-components viz. human capital efficiency, structural capital
efficiency, and capital employed efficiency on financial performance, measured by ROA in two separate periods: stable period (Panel A) and economic crisis
period (Panel B). Our econometric specification remains unchanged, except for controlling for the respective periods. Table 1 provides definitions for all
variables. Robust t-statistics in parentheses.
***p < 0.01. **p < 0.05. *p < 0.1.
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
NAWAZ AND OHLROGGE 3821

on their efficiencies in a comparative manner. Following further report that human capital efficiency drives the
Nawaz's (2019) suggestion, we perform a further analysis financial performance of Deutsche Bank at all times,
controlling for periods of economic distress covered dur- especially, during the periods of economic meltdowns,
ing the study period. suggesting that human capital is the main source of prof-
Results reported in Table 5 show that intellectual cap- itability for the bank.
ital and the efficiency of its sub-components relate posi- Results for the impact of corporate governance fea-
tively with the financial performance at all times. tures and financial performance suggest that board gen-
However, the relationship is not statistically strong dur- der diversity i.e. ratio of female directors on the board
ing the economic crisis periods, except for the human relate positively with the financial performance across
capital efficiency. This indicates human capital is the measures. Finally, we report that CEO's education quality
most significant capital resource that has helped i.e. when the CEO holds a degree from a top100 univer-
Deutsche Bank to maintain its profitability, not only in sity, is an important determinant of financial perfor-
the stable periods but during the economic malaises as mance during the crisis.
well. This is further strengthened by the results for the Our study makes several incremental contributions to
CEO's education quality. The plausible interpretation of multiple literature streams. First, we add to the intellec-
the positive and statistically significant relationship between tual capital literature, particularly, studies that focus on
CEO's education quality and financial performance is that banking organizations (Joshi et al., 2013; Nawaz &
CEOs who graduate from top100 universities are better Haniffa, 2017) by providing, first of its kind, longitudinal
equipped with the knowledge and skills to lead large and evidence on how IC and its subcomponents affect the
complexed organizations during periods of financial dis- performance outcomes of a leading global bank. Second,
tress. These results merit further investigation. while we supplement to the handful of longitudinal stud-
ies in the IC literature such as Campbell and
Rahman (2010) and De Silva et al. (2014), results pres-
5 | C ON C L U S I ON ented in our study extend the general understanding of
IC in value creation in a banking organizations overtime,
The main objective of this paper is to empirically investi- extending the timeline to over six decades. Third, our
gate the impact of corporate governance mechanisms and results for the human capital efficiency provide new
intellectual capital (IC) on bank performance. In contrast insights for the human capital theory of Pfeffer (1994), in
to prior research, this study analysis these relationships recognizing the significance of human capital in
in a longitudinal manner focusing on one of the leading maintaining and sustaining corporate performance in the
banks in the world: Deutsche Bank for the 1957–2019 financial services sector over a longer period
period. We further analyse the nexuses between (Nawaz, 2019; Richard, 2000). Strong and statistically sig-
corporate governance, intangible resources and financial nificant results across stable economic periods and finan-
performance while controlling for CEO traits and bank- cial distress suggest that human capital is the main value
specific attributes during stable periods vis-à-vis the driver in the banking industry. Fourth, results observed
period of economic distress. Additionally, we measure for the corporate governance mechanisms supplement
the impact of IC sub-components viz. human capital, the lively debate on the effectiveness of governance appa-
structural capital and capital employed efficiencies on ratus in large banking organizations (De Cabo
financial performance of Deutsche Bank during the study et al., 2012; Nawaz et al., 2020; Pathan & Faff, 2013).
period. Financial performance is measured using two Fifth, our results related to CEO attributes show which
alternative proxies: return on assets (ROA) and return on CEO attribute matters to the corporate performance,
equity (ROE). To the best of our knowledge, this longitu- thereby, enriching an evolving literature stream
dinal study is the first of its kind conducted on a (Hambrick & Quigley, 2014; Nawaz, 2021). Particularly,
German-based bank. the noted results for the positive link between CEO edu-
Based on a novel hand collected dataset, extracted cation quality and bank performance during the financial
from various sources, our analysis suggests a significant crisis period merit further empirical investigation.
positive relationship between intangible assets To the best of our knowledge, this longitudinal study
i.e. intellectual capital and financial performance mea- is the first of kind, which examines the impact of corpo-
sures. Our results remain consistent across performance rate governance and intellectual capital on Deutsche
measures: ROA and ROE. Furthermore, the segregate Bank's financial performance. Results observed in this
analysis suggests that IC efficiency is determined by study thus have policy and economic implications that go
human capital efficiency and capital employed efficiency beyond Deutsche Bank in focus and can potentially serve
and to a lesser extent by structural capital efficiency. We a larger pool of stakeholders such as bankers, financial
 10991158, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2620 by Nat Prov Indonesia, Wiley Online Library on [29/02/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
3822 NAWAZ AND OHLROGGE

analysts, investors, academics/researchers, and the civic ENDN OTE

society, at large. Arguably, intangible assets such as IC 1
Following earlier studies (e.g., Nawaz et al., 2020), we employ the
has gained impetus resulting from the technological VAIC™ methodology devised by Pulic (2000). We first compute
advances in the financial services sector also referred to Value Added (VA), which is the difference of total income to total
as the FinTech, which has exposed the incumbents such expenses, excluding personal expenses. Human Capital (HC) is the
total personal expenses and HCE = VA/HC. Structural Capital is
as the Deutsche Bank in focus to some of the unforeseen
the difference of VA to HC and SCE = SC/VA. Capital Employed
challenges. One such challenge is the outdated IT sys- is the total physical and financial capital while CEE = VA/CE.
tems (i.e., the structural capital resources), which are not
compatible to the latest FinTech solutions. As a result, an
emerging type of banks i.e. Open Banks, which are well ACKNOWLEDGMENTS
equipped to match the FinTech initiatives are catering We would like to thank Professor Keith Pilbeam, the
the financial needs of a larger clientele and directly pos- Editor-in-Chief and the anonymous reviewers for their
ing heightening competition to conservative incumbents valuable comments, which have helped to improve cer-
in commercial banking. Besides, emerging trends in the tain aspects of the paper.
financial markets such as the use of blank cheque compa-
nies or special purpose acquisition company (SPAC) to DA TA AVAI LA BI LI TY S T ATE ME NT
raise financial capital, are having direct impact on the Data available on request due to privacy/ethical restric-
bottom line of investments banking organs of the incum- tions. The data that support the findings of this study are
bents and there is no exception for Deutsche Bank. These available on request from the corresponding author. The
factors add further credibility to the arguments presented data are not publicly available due to privacy or ethical
in our study by stemming the fact that competitive restrictions.
advantage lies in the efficient allocation and deployment
of intangible resources. Thus, we suggest the banking
ORCID
and finance industry -both executives and the monitoring
Tasawar Nawaz https://orcid.org/0000-0001-9683-5026
authorities such as the corporate boards -to capitalize on
the intangible assets, should they wish to sustain compet-
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ronments and thus are not limited to the Deutsche annual reports, 1978–2008. The British Accounting Review,
Bank in focus. The results, however, can potentially 42(1), 56–70.
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