Directors with a full plate: the impact of busy directors on bank risk

Abstract

PurposeThis paper aims to analyze the impact of busy directors on bank risk. Busy directors are directors with multiple directorships and other corporate responsibilities.Design/methodology/approachFirst, univariate analysis is performed to see whether there are differences in governance structures of banks with busy boards and those with less‐busy boards of directors. Second, multivariate regression analysis is used with two measures of bank risk as the dependent variable to see whether busy directors impact bank risk, while controlling for other factors that may influence risk.FindingsThe paper finds that there are significant differences between banks in terms of governance structure when analyzing banks with busy boards and banks with less‐busy boards. Importantly, the study shows that bank risk is positively related to multiple board appointments of bank directors.Research limitations/implicationsThese results provide support for the “busyness hypothesis” as opposed to the “reputation hypothesis” and add to the understanding of whether busy directors hurt or help boards.Practical implicationsResults are important for regulators who seek to maintain a safe and sound banking system. Regulators can gain a better understanding of how much time and effort individual directors can contribute to a bank under examination.Originality/valueThis is the first study in the banking literature on multiple board appointments. It also uses a unique approach to test whether director busyness is a determinant of bank risk.