Boards of Banks

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday July 30, 2010 at 9:34 am
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Editor’s Note: This post comes to us from Daniel Ferreira, Tom Kirchmaier, and Daniel Metzger all of the London School of Economics.

In our paper, Boards of Banks, which was recently made publicly available on SSRN, we assemble the most complete data set on boards of banks to date. Our data allow us to draw a detailed picture of bank board composition up to and including the crisis period. The data reveal a number of new empirical facts. Right before the beginning of the crisis in 2007, the average board independence in the world’s largest banks was roughly 67%, meaning that two out of three bank directors were formally independent. These high levels of independence are both a recent and mostly North-American phenomenon. In 2000, the average level of board independence in our sample was just 40%. Canada and the US have the highest levels of bank board independence in the world, at about 75%.

Our data also reveal many interesting patterns. Client-directors are usually reported as being independent, although they have clear business relations with the banks that they are supposed to monitor. While the governance literature has focused on the role of bankers on boards of nonfinancial firms, the other side of the coin – nonfinancial corporate clients on boards of banks – has yet to be analyzed.

We find that very few outside directors have previous banking experience. A natural question is whether the current level of banking experience among bank directors is inefficiently low. Regulators and policy-makers have recently emphasized the importance of banking experience and financial expertise for outside directors; an example is the Walker (2009) review in the UK. Hau and Thum (2009) find that measures of board competence, including previous banking experience, are positively related to the performance of German banks during the crisis. Cuñat and Garicano (2010) find that chairmen’s human capital crucially affected the performance of Spanish savings banks during the crisis.

Overall, our evidence suggests that country characteristics matter substantially for bank board independence. We show that some board regulations are robustly associated with bank board characteristics. Our findings raise the question of whether board regulation helps or hinders bank governance.

The full paper is available for download here.

  1. I would ask you to look at the attached research I was involved in for teh UK market.
    http://www.grant-thornton.co.uk/pdf/GT-NED-Research-Report.pdf
    This was prepared after the UK Financial Reporting Council became interested in informal research of mine which revealed that the UK financial institutions which failed in the recent crisis, had a higher % of seemingly relevant experience among their non-executives – perhaps they thought they knew it and forget to ask those probing questions and got too caught up in the group think of the profits they were chasing.

    Comment by Simon King — August 1, 2010 @ 3:09 pm

 

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