Effect of CEO power and board strength on bank performance in China

Abstract

Given that a powerful CEO is more likely to overcome problems and control performance in a firm, this study first focuses on exploring whether CEO power positively affects certain measures of bank performance and which sources of CEO power have these positive impacts. Next, this study further analyzes whether the positive impact of CEO power on performance is negatively mediated by board strength. Our sample includes data on the three main types of Chinese banks for 2006 to –2016.Our results show that CEO structural power significantly improves a bank’s overall profitability, risk-taking ability and lending quality, CEO ownership power significantly raises a bank’s lending quality, and CEO expert power significantly increases a bank’s overall and shareholder profitability. As considering the endogeneity, CEO prestige power significantly improves a bank’s overall profitability. Next, we use the proportion of independent directors as our measure of board strength and find that a stronger board reduces the beneficial effects of CEO structural power on a bank’s lending quality, of CEO ownership power on shareholder profitability, and of CEO expert power on lending quality. There are similar harmful mediating effects when we use the proportion of foreign investors and board size as measures of board strength. Our results can help Chinese bank authorities develop policies to appropriately raise bank CEOs’ power and reduce board supervision of CEO power.