Board characteristics and efficiency of value added by banks: Evidence from an emerging economy

Abstract

This paper estimates the efficiency of value added by banks using their total resources (physical capital resources and intangible resources) and finds an association between board characteristics and efficiency of value added. The paper is grounded in the theory of resource and knowledge based view of the firm, and agency theory, and tries to establish links between these two theories. This study departs from existing literature of examining the effect of board characteristics on financial performance, corporate sustainability, and corporate environmental responsibility, and tries to understand the relationship between board characteristics and the efficiency of value added by banks through their resources. This is also the first study of its kind to study the relationship between board structure characteristics and value creation in Indian banks using the Value Added Intellectual Coefficient (VAIC) methodology. Using the data for 41 commercial banks in India from 2008 to 2017 and by employing Prais-Winsten Regression, this study finds that board meetings and CEO-Chairman duality significantly and positively influence the efficiency of value added by banks through their total resources and intellectual capital resources. At the same time, independence in the boards negatively influences the efficiency of value added through physical capital resources. Overall, the findings of the paper indicate that board governance influences bank performance measured in terms of efficiency of value added. Policymakers, regulators, and bank managers should frame appropriate policies to ensure more board meetings, and the presence of board duality.