Abstract
The banking sector is special given the importance of credit to support economic growth, and enormous public costs periodically sustained to bailout extensive institutional failures. US banks fail in waves approximately every generation and are unable to cope with severe economic downturns and incur excessive risk in a predictable and preventable manner. Is good corporate governance focusing on efforts to refresh boards by age or term limits the cause of episodic failure? As institutions refresh boards, banks lose directors with experience related to prior periods of crisis. Consistent with the availability heuristic, recall and memory are important to judgment. If relatively few directors have personal experience of a prior financial disaster, they are unable to recommend more conservative strategies. While some deservedly will believe the proposal a reversal in good governance, banks should consider suspending term and/or mandatory age limits for a few directors. Each board will need to overcome common #x201C;blind spots#x201D; that young equals good. Ageism is well-known and documented. The proposal is consistent with academic research demonstrating that some attributes of #x201C;good governance#x201D; have proven harmful to firms in a crisis. There are problems for boards dominated by many longserving directors as identified by the CEO allegiance hypothesis. However, having no long-term, independent director experience has its own risk in the banking sector #x2013; failure.
Highlights
The banking sector is special given the importance not all, studies suggest banks with more diverse of credit to support economic growth, and enormous public independent directors adopt more conservative policies costs periodically sustained to bailout extensive institutional and achieve better credit ratings conducive to survival
42 percent of firms mandate a maximum retirement age of 75.3 As a result of forced and voluntary turnover, the average bank can be directed by three distinct boards between crises that occur approximately every 20 to 25 years
Age and term limits are a blunt instrument for achieving optimal board composition.”[5]. We explore failure in the banking industry to determine if periodic crises and financial panics are predictable and preventable, and to assess what extent corporate governance contributes to the inability to learn from the long and costly experience
Summary
George Washington University Abstract- The banking sector is special given the importance of credit to support economic growth, and enormous public costs periodically sustained to bailout extensive institutional failures. Banks lose directors with experience related to prior periods of crisis. Is good corporate governance focusing on efforts to refresh boards by age or term limits the cause of episodic failure? Age and term limits are a blunt instrument for achieving optimal board composition.”[5] We explore failure in the banking industry to determine if periodic crises and financial panics are predictable and preventable, and to assess what extent corporate governance contributes to the inability to learn from the long and costly experience. We later recommend that banks suspend mandatory term or age limits for a few directors to ensure the board is better able to retrieve the lessons of prior crises. After years of low interest rates consistent with an accommodative monetary policy engineered by the Federal Reserve, investors are seeking high-yield investments and aggressively purchasing leveraged-debt securities with far fewer protective covenants than common several years ago and expose creditors to higher losses given default in the downturn.[12]
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