Saturday, December 17, 2011

Bank Board Structure and Performance


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

The financial crisis has put a spotlight on the corporate governance structures of financial institutions, raising questions about whether the prevailing governance structures of banks are ineffective and whether implementing independence standards imposed by the Dodd-Frank Act, the Sarbanes-Oxley Act and the major stock exchanges will improve bank governance. A recently published paper by Renee Adams, Professor of Finance at the University of New South Wales, and Hamid Mehran of the Federal Reserve Bank of New York, attempts to answer to this question by examining the relationship between board composition and size and bank performance.

The paper, entitled Bank Board Structure and Performance: Evidence for Large Bank Holding Companies, addresses a long-standing gap in the literature about bank corporate governance by analyzing the relationship between board governance and performance using a sample of banking firm data that spans 34 years. Mehran and Adams' findings demonstrate that, though board independence is not related to performance (as measured by a proxy for Tobin’s Q), board size is positively related to performance. Further, their research provides new evidence that increases in board size due to additions of directors with subsidiary directorships may add value as bank holding company complexity increases. Mehran and Adams' findings suggest that, as regulators look for new ways to reform corporate governance, they should pay close attention to the unique features of bank governance.


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