Bank Ownership, Board Characteristics and Performance: Evidence from Commercial Banks in India

Jayati Sarkar,Subrata Sarkar

doi:10.3390/ijfs6010017

Abstract

We study the effect of board governance in state-owned and private banks by undertaking a study of commercial banks in India that has both bank groups. Covering a ten-year period from 2003 to 2012 that witnessed a large number of governance reforms in India, the results of our empirical analysis provide evidence of strong ownership effects with board independence exhibiting a significant positive correlation with the performance of private banks and a significant but negative correlation with the performance of state-owned banks. The effect of CEO duality is negative in state-owned banks where incidence of CEO duality is high. We find that a longer CEO tenure has significant positive effects on bank outcomes with these effects strengthening in the later years of CEO tenure. Our results have governance implications for strengthening the composition of board of directors and CEO tenure especially in state-owned banks.

Highlights

The role of the board of directors in the governance of financial institutions has come under increasing scrutiny from both policy makers and researchers in the aftermath of the global financial crisis of 2008
This paper examined the effect of board governance in state-owned and private banks by undertaking a study of commercial banks in India that has both bank groups
Covering a ten-year period from 2003–2012 that witnessed a large number of governance reforms in India and focusing on board characteristics that have been found in prior literature to be important determinants of bank outcomes, the results of our empirical analysis suggest that while board size plays an insignificant role in bank outcomes, board independence plays a significant role

Summary

Introduction

The role of the board of directors in the governance of financial institutions has come under increasing scrutiny from both policy makers and researchers in the aftermath of the global financial crisis of 2008. The Basel Committee in October 2010 (Basel 2010) issued a set of principles for enhancing corporate governance in banking organizations and highlighted the importance of the board of directors, the qualifications and composition of the board, the importance of monitoring risks at the firm level, board oversight on executive compensation and the board’s understanding of the bank’s operational structure and risks. Other international efforts at promoting better governance of banks by the board of directors came through the OECD (OECD 2010) and the Walker Review (Walker 2009). In light of this focus on bank boards, the burgeoning literature that existed on board governance for non-financial corporations began to be extended to financial institutions and a number of studies. Noting that financial institutions have peculiarities in terms of their high opaqueness and heavy regulation (Levine 2004; Macey and O’Hara 2003), these studies examined the effect of specific board attributes like board size, board composition, CEO duality, board activity and busyness of directors on bank performance and asset quality (Andres and Vallelado 2008; Adams and Mehran 2012; Liang et al 2013) while other studies analysed the effect of these attributes on the risk taking and risk management behaviour of banks (Erkens et al 2012; Aebi et al 2012; Faleye and Krishnan 2017)

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