Financial Conglomerates and Board Structure on Bank Performance: Some Evidence after the Sarbanes-Oxley Act

Abstract

Due to the banking industry's characteristics of opacity and strict regulation, the Basel Committee re-emphasized the importance of board directors in banking firms. From data taken from 2003 to 2008 after the passage of the Sarbanes-Oxley Act, we find that only three variables play important roles in enhancing U.S. bank performance, with and without controlling for the impact of bank diversification. These variables are: leadership structure, busy board, and certified inside directors; these findings are statistically consistent in OLS and TSLS regressions. Leadership structure and busy board both have positive impacts on bank performance while certified inside directors reduce it. Since bank diversification has a positive impact on bank performance (Tobin's Q), we create individual interactive terms between these board structure variables and the level of diversification to examine the indirect impact of these board structure variables on the relationship between bank diversification and performance. The results show that busy board (certified inside directors) enhances (reduces) the positive impact of bank diversification on performance. This provides insights for policymakers regarding how to strengthen bank corporate governance to alleviate the increased agency problems faced after the bank deregulations.