Supervisory boards, financial crisis and bank performance: do board characteristics matter?

Catarina Fernandes,Cesario Mateus,Jorge Farinha,Francisco Vitorino Martins

doi:10.1057/s41261-016-0037-5

Catarina Fernandes, Cesario Mateus + Show 2 more

Open Access

https://doi.org/10.1057/s41261-016-0037-5

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Abstract

Failures in governance, especially in regard to boards of directors, have been blamed for the 2007–2008 financial crisis. The increased public scrutiny regarding the actions and role of the board of directors in banks, following the crisis, inspires to examine whether and to what extent the characteristics of banks’ boards influence their performance in the crisis. Using a sample of 72 publicly listed European banks, we find that banks with more independent and busy boards experienced worse stock returns during the crisis. Conversely, the better-performing banks had more banking experts serving as supervisory directors. Additionally, we find that gender and age diversity improved banks’ performance during the crisis; hence, diversity matters. We also construct a governance quality index on the basis of board characteristics and conclude that governance quality positively affects banks’ returns during the crisis. Overall, we find evidence that banks’ performance during the financial crisis is a function of their boards’ characteristics.

Highlights

The 2007-2008 financial crisis has been described as the most serious crisis since the Great Depression,[1,2,3] having important effects on the real economy and posing challenges for economists, regulators and policymakers.[4]
Bank performance and board characteristics We examine the relation between bank performance and board characteristics during the crisis by regressing buy-and-hold-stock return on our board characteristics and control variables using the Weighted Least Squares (WLS) model
We find support for hypothesis H6.1 that female supervisory directors improve bank performance during the financial crisis, which is in accordance with the Kristof,[56] Morris[57] and Treanor[58] findings that the lack of women in banks boards contributed to their poor performance

Summary

Introduction

The 2007-2008 financial crisis has been described as the most serious crisis since the Great Depression,[1,2,3] having important effects on the real economy and posing challenges for economists, regulators and policymakers.[4]. “Endogeneity leads to biased and inconsistent parameter estimates that make reliable inference virtually impossible.”15(p6) the findings of the studies that examine the board structure-performance relationship must be analysed with caution if the empirical methods do not check adequately for all relevant sources of endogeneity.[16] In our research this issue is less likely to be problematic because the financial crisis is an exogenous macroeconomic shock.[17,18,19] by testing a set of board characteristics immediately before the external shock in order to explain changes in banks value, we can largely eliminate the endogeneity concern. Our paper contributes to the academic governance studies that have attempted to understand the role of corporate boards in the crisis period, such as those of Erkens et al,[18] Francis et al[19] and Adams.[20] We complement the existing literature by showing that bank-level differences in boards are crucial to determining changes in bank performance during the crisis.

Literature review and hypotheses development

Data and methodology

Empirical model and estimation method

13 Capital

Findings

Conclusion