Bank Board Structure and Performance: Evidence For Large Bank Holding Companies

BANK BOARD STRUCTURE AND
PERFORMANCE: EVIDENCE FOR LARGE BANK

HOLDING COMPANIES AUTHOR
RENÉE B. ADAMS1 UNIVERSITY OF QUEENSLAND
AND
ECGI HAMID MEHRAN2 FEDERAL RESERVE BANK OF NEW
YORK
PRESENTED BY KAMAL SAEED
ID 5719580
INTRODUCTION.
• The subprime crisis highlights how little we know about the governance of
banks. This paper addresses a long-standing gap in the literature by
analyzing the relationship between board governance and performance using
a sample of banking firm data that spans 34 years. We find that board
independence is not related to performance, as measured by a proxy for
Tobin’s Q. However, board size is positively related to performance. We
propose a new instrument for board size, a measure of flight availability to
BHC headquarters
• Most studies of board effectiveness exclude financial firms from their samples. As a
result, we know very little about the effectiveness of banking firm governance.
• financial crisis differs from previous financial crises in that bank governance is being
accorded a large part of the blame for the crisis. For example, the Organization for
Economic Co-Operation and Development (OECD) Steering Group on Corporate
Governance argues that board failures in financial firms are a major cause of the
financial crisis (Kirkpatrick, 2009) and has launched an action plan to improve their
governance
• In order to evaluate and propose changes to banking firms’ governance
structures, it is important to understand how banks are typically governed and
whether and how banking firm governance differs from the governance of
unregulated firms. This last issue is particularly important since many
governance reform proposals are motivated by studies of non-financial
organizations.
• The fact that bank boards are larger in the U.K. than those of other listed
firms mirrors the findings for the U.S. (e.g. Adams and Mehran, 2003; Adams,
2009a; Booth, Cornett and Tehranian, 2002, Kroszner and Strahan, 2001).
• Banks clearly appear to have different governance structures than non-financial firms. The
question is whether these governance structures are ineffective, as the Walker Review seems
to suggest. The purpose of this paper is to try to provide an answer to this question by
examining the relationship between board composition and size and bank performance. We
focus on large, publicly traded bank holding companies (BHCs) in the U.S., which are the
banks that are mentioned most often in the context of the crisis.
• recent literature examining determinants of board size and composition suggests that larger
and more complex firms will require more advice from their boards and thus have larger
boards (e.g. Boone, Fields, Karpoff and Raheja, 2007; Coles, Daniel and Naveen, 2008;
Lehn, Patro and Zhao, 2008 and Linck, Netter and Yang, 2008). Consistent with this argument,
Coles, Daniel and Naveen (2008) and Graham, Hazarika and Narasimhan (2008) find that
larger boards appear to add value in more complex firms. Because large publicly traded
banks can all be considered to be complex, it is plausible that the relationship between board
size and performance is positive for BHCs even though their boards are larger than in non-
financial firms.
DATA
• Primary sample of firms consists of a random sample of 35 publicly traded BHCs which were
amongst the 200 largest (in terms of book value of assets) top tier BHCs for each of the years
1986-1996. We collected additional data on these firms for the years 1997-1999 even if
they were no longer among the top 200. However, the number of firms drops from 35 to 32
during those years due to M&A activity. The requirement that the firms must be publicly
traded made it possible to collect data on board size and composition as well as other
internal governance characteristics of the firms from proxy statements filed with the SEC. In
addition, we collected balance sheet data from the fourth quarter Consolidated Financial
Statements for Bank Holding Companies (Form FR Y-9C) from the Federal Reserve Board and
stock price and return data from CRSP.8 Because of the high cost of hand collecting detailed
internal governance variables over the 1986-1999 period, we could only focus on a
relatively small number of BHCs.
TABLE 2 FIXED EFFECT REGRESSIONS OF TOBIN’S Q ON BOARD
STRUCTURE PLUS CONTROLS
CONCLUSION
• Board composition has little relationship with performance, consistent with

findings for non-financial firms.
• result does not appear to be entirely driven by reverse causality or omitted
variables related to M&A activity.Paper provide evidence suggesting that one
possible explanation for this results is that larger boards have more directors
with subsidiary directorships. These directors may be particularly suited to
deal with organizational complexity
• Bank holding companies often have complicated hierarchical structures
through their ownership or control of banks, lower level BHCs and other
subsidiaries. Each of these subsidiaries is separately chartered with its own
board. Thus, it is plausible that the coordination of activities across subsidiaries
occurs through memberships on these boards. In contrast, non-financial firms
are often organized along functional or divisional lines, none of which need
have a separate legal identity
• analysis suggests that banks may have special governance features that need
to be taken into account when designing governance reform proposals.

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BANK BOARD STRUCTURE AND

PERFORMANCE: EVIDENCE FOR LARGE BANK

• Board composition has little relationship with performance, consistent with

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