Abstract
The paper investigates the implications of busy directors on bank performance and bank risks in Brazil. The study employs an event study based on a change in board status as an identification strategy, Heckman’s two-stage model, and the propensity score matching method to account for endogeneity. The study findings show that busy directors contribute to an increase in bank market value. Regarding bank risks, the study shows that multiple directorships contribute to an increase in asset risk and insolvency risk. The study contributes to the existing literature by showing that busy directors are associated with high bank risks in foreign-owned banks while they disproportionately reduce bank risks in state-owned banks. Considering the importance of bank stability in promoting economic growth in Brazil and the positive impact of busy directors on bank risks, there is need for the policymakers to craft clear corporate governance clauses which guide the selection of multiple directors and enforce feedback and accountability mechanisms that govern busy directors who serve in Brazilian banks. Reducing excessive participation for busy directors serving in bank boards ensures that the directors have adequate time and attention to discharge their governance responsibilities efficiently, thus resulting in robust risk monitoring strategies in bank operations.
Highlights
There is a growing perception that weak corporate governance systems contribute to managerial opportunism, poor bank performance and excessive bank risk
While the agency theory emphasizes the oversight role of directors, the resource dependency theory connotes that outside directors bring a wealth of human capital resources in the business which disproportionately contributes to robust corporate governance and firm performance (Pfeffer, 1972; Pfeffer & Salancik, 1978)
Since the financial crisis of 2008 to 2009 banks, there is an increased interest in corporate governance studies focusing on banks (Adams & Mehran, 2011; Elyasiani & Zhang, 2015)
Summary
There is a growing perception that weak corporate governance systems contribute to managerial opportunism, poor bank performance and excessive bank risk. It is argued that close monitoring of the management by effective boards on behalf of the shareholders can help minimize the agency conflicts (Faleye et al, 2018; Jensen & Meckling, 1976). While the agency theory emphasizes the oversight role of directors, the resource dependency theory connotes that outside directors bring a wealth of human capital resources in the business which disproportionately contributes to robust corporate governance and firm performance (Pfeffer, 1972; Pfeffer & Salancik, 1978). According to the resource dependency theory appointing busy directors is another channel that businesses can use to complement scarce internal human capital and financial resources. According to the resource dependency theory, companies carefully select busy directors based on their reputation (Fama & Jensen, 1983) and expertise which are essential for robust monitoring and advising
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