Corporate Board Structures and Performance in the Banking Industry: Evidence from Japan

Abstract

The recent global financial crisis contributes for recognizing the importance of corporate governance mechanisms in the banking industry. Although mixed evidence is associated with the role of board of directors in non-financial industries, a few analyses have been made of the relation between board composition and firm performance of the banking industry in several OECD countries. This paper examines the relation between board size and composition and firm performance and its relations with financial systems and maintenance of foreign branches for a banking industry during 2006-2009. We find that banking firms with larger boards underperform their peers in terms of Tobin’s Q and that no significant relation between the proportion of outside directors on the board and Tobin’s Q. We also argue that banks with taxpayer money and foreign branches would make a larger board more desirable for these firms because they face the requirement of improving management. After accounting for these unique features of Japanese banks, we find that board structures of Japanese banking industry are well performed only in banks with taxpayer money. In addition, Tobin’s Q is negatively correlated with board size in banks with foreign branches. This finding suggests that the board structures of bank with foreign branches might be the causes of agency problem. Our findings imply that board structures of Japanese banking remains for the improvement and that a greater need for efforts on the part of the banking sector to change and improve their board structures.