A non-parametric synthesis measure for board quality: empirical evidence from Indian banks

Abstract

PurposeThe paper aims to craft a non-parametric composite value for the board quality of Indian banks where the weights can be assigned endogenously.Design/methodology/approachThe study employed a non-parametric data envelopment analysis (DEA)-based novel extension known as the benefit of doubt approach. To measure the strength of the Indian bank corporate board in terms of board efficiency (BEF), the study used a mixed approach, i.e. first, the study calculates the percentile ranks of the five attributes that the study assumes are the characteristics of the strong board including board size, number of outside directors, frequency of meetings, non-duality leadership and board gender diversity. Thereafter, the study performs the benefit-to-doubt approach to finally measure the efficiency of the board.FindingsThe findings of the study establish that the methodological framework present in the study to measure the strength of the board in terms of BEF has been a much superior method over the other weighted and non-weighted linear average methods.Practical implicationsThis methodology aids the shareholders, investors and regulatory bodies in rating the Indian banks based on their strength in terms of better monitoring boards and ensuring a smooth agent–owner relationship.Originality/valueThe benefit of doubt approach has been a unique and novel methodology to craft the composite value for any multidimensional phenomenon. One of the major benefits of using this approach is that it assigns the weights endogenously to each dimension and thereafter collectively determines the efficiency of such a phenomenon.