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.
This is a preview of subscription content,to check access.
Access this article
References and Notes
Brunnermeier, M.K. (2009) Symposium: Early stages of the credit crunch: Deciphering the liquidity and credit crunch 2007–2008. Journal of Economic Perspectives 23(1): 77–100.
Eichengreen, B. and O’Rourke, K. (2010) A tale of two depressions: What do the new data tell us? http://voxeu.org/taxonomy/term/1619, accessed 27 May, 2014.
Beltratti, A. and Stulz, R.M. (2012) The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics 105(1): 1–17.
Gorton, G. (2009) The subprime panic. European Financial Management 15(1): 10–46.
Adams, R.B. and Mehran, H. (2012) Bank board structure and performance: Evidence for large bank holding companies. Journal of Financial Intermediation 21(2): 243–267.
Complex firms, such as those that operate in multiple segments, are large in size, or have high leverage are likely to have greater advising requirements (Ref. 7).
Coles, J.L., Daniel, N.D. and Naveen, L. (2008) Boards: Does one size fit all? Journal of Financial Economics 87(2): 329–356.
Fama, E.F. and Jensen, M.C. (1983) Separation of ownership and control. The Journal of Law and Economics 26(2): 301–325.
Weisbach, M.S. (1988) Outside directors and CEO turnover. Journal of Financial Economics 20: 431–460.
Adams R. and Mehran, H. (2003) Is corporate governance different for bank holding companies? Federal Reserve Bank of New York Economic Policy Review 9(1): 123–142.
Adams, R.B. and Ferreira, D. (2007) A theory of friendly boards. The Journal of Finance 62(1): 217–250.
Andres, P. and Vallelado, E. (2008) Corporate governance in banking: The role of the board of directors. Journal of Banking & Finance 32(12): 2570–2580.
Adams, R.B., Hermalin, B.E. and Weisbach, M.S. (2010) The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of Economic Literature 48(1): 58–107.
Schwartz-Ziv, M. and Weisbach, M.S. (2013) What do boards really do? Evidence from minutes of board meetings. Journal of Financial Economics 108(2): 349–366.
Hermalin, B.E. and Weisback, M.S. (2003) Board of directors as an endogenously determined institution: A survey of the economic literature. Federal Reserve Bank of New York Economic Policy Review 9(1): 7–26.
Roberts, M.R. and Whited, T.M. (2012) Endogeneity in empirical corporate finance. Simon School working paper No. FR 11-29, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1748604 or http://dx.doi.org/10.2139/ssrn.1748604.
Wintoki, M.B., Linck, J.S. and Netter, J.M. (2012) Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics 105(3): 581–606.
Baek, J.-S., Kang, J.-K. and Park, K.S. (2004) Corporate governance and firm value: evidence from the Korean financial crisis. Journal of Financial Economics 71(2): 265–313.
Erkens, D.H., Hung, M. and Matos, P. (2012) Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance 18(2): 389–411.
Francis, B.B., Hasan, I. and Wu, Q. (2012) Do corporate boards matter during the current financial crisis? Review of Financial Economics 21(2): 39–52.
Adams, R.B. (2012) Governance and the financial crisis. International Review of Finance 12(1): 7–38.
Gilson, S.C. (1990) Bankruptcy, boards, banks, and blockholders: Evidence on changes in corporate ownership and control when firms default. Journal of Financial Economics 27(2): 355–387.
Rosenstein, S. and Wyatt, J.G. (1990) Outside directors, board independence, and shareholder wealth. Journal of Financial Economics 26(2): 175–191.
O’Connell, V. and Cramer, N. (2010) The relationship between firm performance and board characteristics in Ireland. European Management Journal 28(5): 387–99.
The problem associated with outside directors’ lack of firm-specific knowledge may be exacerbated for banks because regulatory restrictions may act to limit the pool of directors from which they can choose (Ref. 5) and because of the complex nature of their businesses (Ref. 21).
Pathan, S. and Faff, R. (2013) Does board structure in banks really affect their performance? Journal of Banking & Finance 37(5): 1573–1589.
Lipton, M. and Lorsch, J.W. (1992) A modest proposal for improved corporate governance. The Business Lawyer 48(1): 59–77.
Jensen, M.C. (1993) The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance 48(3): 831–880.
Raheja, C.G. (2005) Determinants of board size and composition: A theory of corporate boards. Journal of Financial and Quantitative Analysis 40(2): 283–306.
Staikouras, P.K., Staikouras, C.K. and Agoraki, M.-E.K. (2007) The effect of board size and composition on European bank performance. European Journal of Law and Economics 23(1): 1–27.
Grove, H., Patelli, L., Victoravich, L.M. and Xu, P. (2011) Corporate governance and performance in the wake of the financial crisis: Evidence from US commercial banks. Corporate Governance: An International Review 19(5): 418–436.
Minton, B.A., Taillard, J.P. and Williamson, R. (2014) Financial expertise of the board, risk taking, and performance: Evidence from bank holding companies. Journal of Financial and Quantitative Analysis 49(2): 351–380.
We refer to the combination of the roles of the CEO and the Chairman of the board as CEO duality. So, CEO duality exists when a firm's CEO also serves as Chairman of the board of directors.
Mallette, P. and Fowler, K.L. (1992) Effects of board composition and stock ownership on the adoption of “poison pills”. Academy of Management Journal 35(5): 1010–1135.
Brickley, J.A., Coles, J.L. and Jarrell, G. (1997) Leadership structure: Separating the CEO and Chairman of the board. Journal of Corporate Finance 3(3): 189–220.
Dey, A., Engel, E. and Liu, X. (2011) CEO and board chair roles: To split or not to split? Journal of Corporate Finance 17(5): 1595–1618.
Macey, J.R. and O’Hara, M. (2003) The corporate governance of banks. Federal Reserve Bank of New York Economic Policy Review 9(1): 91–107.
Furfine, C.H. (2001) Banks as monitors of other banks: Evidence from the overnight federal funds market. Journal of Business 74(1): 33–57.
Caprio, G. and Levine, R. (2002) Corporate governance of banks: Concepts and international observations. Paper presented at the Global Corporate Governance Forum Research Network Meeting; 5 April.
Morgan, D.P. (2002) Rating banks: Risk and uncertainty in an opaque industry. The American Economic Review 92(4): 874–888.
Mülbert, P.O. (2009) Corporate governance of banks. European Business Organization Law Review (EBOR) 10(3): 411–436.
Not only are bank balance sheets clearly opaque, (Ref. 37) but also “rapid developments in technology and increased financial sophistication have challenged the ability of traditional regulation and supervision to foster a safe and sound banking system” (Ref. 38).
Becht, M., Bolton, P. and Röell, A. (2011) Why bank governance is different. Oxford Review of Economic Policy 27(3): 437–463.
Hau, H. and Thum, M. (2009) Subprime crisis and board (in-)competence: Private versus public banks in Germany. Economic Policy 24(60): 701–752.
Kirkpatrick, G. (2009) Corporate governance lessons from the financial crisis. OECD Journal: Financial Market Trends 2009/1(1): 61–87.
For more details, see http://www.sec.gov/rules/final/2009/33-9089-secg.htm.
Cox, T.H. and Blake, S. (1991) Managing cultural diversity: Implications for organizational competitiveness. Academy of Management Executive 5(3): 45–56.
Robinson, G. and Dechant, K. (1997) Building a business case for diversity. Academy of Management Executive 11(3): 21–31.
Siliciano, J.I. (1996) The relationship of board member diversity to organizational performance. Journal of Business Ethics 15(12): 1313–1320.
Carter, D.A., Simkins, B.J. and Simpson, W.G. (2003) Corporate governance, board diversity, and firm value. The Financial Review 38(1): 33–53.
Bernardi, R.A., Bean, D.F. and Weippert, K.M. (2005) Minority membership on boards of directors: the case for requiring pictures of boards in annual reports. Critical Perspectives on Accounting 16(8): 1019–1033.
Farrell, K.A. and Hersch, P.L. (2005) Additions to corporate boards: The effect of gender. Journal of Corporate Finance 11(1–2): 85–106.
Adams, R.B. and Ferreira, D. (2009) Women in the boardroom and their impact on governance and performance. Journal of Financial Economics 94(2): 291–309.
Kang, E., Ding, D.K. and Charoenwong, C. (2010) Investor reaction to women directors. Journal of Business Research 63(8): 888–894.
Adams, R.B. and Funk, P. (2012) Beyond the glass ceiling: Does gender matter? Management Science 58(2): 219–235.
Julizaerma, M.K. and Sori, Z.M . (2012) Gender Diversity in the Boardroom and Firm Performance of Malaysian Public Listed Companies. Procedia – Social and Behavioral Sciences 65(1): 1077–1085.
Kim, I., Pantzalis, C. and Park, J.C. (2013) Corporate boards’ political ideology diversity and firm performance. Journal of Empirical Finance 21(1): 223–240.
García-Meca, E., García-Sánchez, I.-M. and Martínez-Ferrero, J. (2015) Board diversity and its effects on bank performance: An international analysis. Journal of Banking & Finance 53(1): 202–214.
Kristof, N.D. (2009) Mistresses of the universe. The New York Times, 7 February.
Morris, N. (2009) Harriet Harman: ‘If only it had been Lehman Sisters’. The Independent, 4 August.
Treanor, J. (2011) EU calls for women to make up one-third of bank directors. The Guardian, 21 June.
Geletkanycz, M.A. (1997) The salience of ‘culture’s consequences’: The effects of cultural values on top executive commitment to the status quo. Strategic Management Journal 18(8): 615–634.
Schneider, S.C. and De Meyer, A. (1991) Interpreting and responding to strategic issues: The impact of national culture. Strategic Management Journal 12(4): 307–320.
Hambrick, D.C., Davidson, S.C., Snell S.A. and Snow, C.C. (1998) When groups consist of multiple nationalities: Towards a new understanding of the implications. Organization Studies 19(2): 181–205.
Masulis, R.W., Wang, C. and Xie, F. (2012) Globalizing the boardroom – The effects of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics 53(3): 527–554.
Nielsen, B.B. and Nielsen, S. (2013) Top management team nationality diversity and firm performance: A multilevel study. Strategic Management Journal 34(3): 373–382.
Wiersema, M.F. and Bantel, K.A. (1992) Top management team demography and corporate strategic change. Academy of Management Journal 35(1): 91–121.
Kaplan, S.N. and Reishus, D. (1990) Outside directorships and corporate performance. Journal of Financial Economics 27(2): 389–410.
Ferris, S.P., Jagannathan, M. and Pritchard, A.C. (2003) Too busy to mind the business? Monitoring by directors with multiple board appointments. The Journal of Finance 58(3): 1087–1112.
Fich, E.M., Shivdasani, A. (2007) Financial fraud, director reputation, and shareholder wealth. Journal of Financial Economics 86(2): 306–336.
Core, J.E., Holthausen, R.W. and Larcker, D.F. (1999) Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51(3): 371–406.
Shivdasani, A. and Yermack, D. (1999) CEO involvement in the selection of new board members: An empirical analysis. The Journal of Finance 54(5): 1829–1853.
Loderer, C. and Peyer, U. (2002) Board overlap, seat accumulation and share prices. European Financial Management 8(2): 165–192.
Fich, E.M. and Shivdasani, A. (2006) Are busy boards effective monitors? The Journal of Finance 61(2): 689–724.
Cashman, G.D., Gillan, S.L. and Jun, C. (2012) Going overboard? On busy directors and firm value. Journal of Banking & Finance 36(12): 3248–3259.
Muller-Kahle, M.I. and Lewellyn, K.B. (2011) Did board configuration matter? The case of US subprime lenders. Corporate Governance: An International Review 19(5): 405–417.
Conger J.A., Finegold, D. and Lawler, E.E. (1998) Appraising boardroom performance. Harvard Business Review 76(1): 136–48.
Vafeas, N. (1999) Board meeting frequency and firm performance. Journal of Financial Economics 53(1): 113–142.
The countries are Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and United Kingdom.
Fahlenbrach, R. and Stulz, R.M. (2011) Bank CEO incentives and the credit crisis. Journal of Financial Economics 99(1): 11–26.
Aebi, V., Sabato, G. and Schmid, M. (2012) Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance 36(12): 3213–3226.
Fahlenbrach, R., Prilmeier, R. and Stulz, R.M. (2012) This time is the same: Using bank performance in 1998 to explain bank performance during the recent financial crisis. The Journal of Finance 67(6): 2139–2185.
Denis, D.K. and McConnell, J.J. (2003) International corporate governance. Journal of Financial and Quantitative Analysis 38(1): 1–36.
Engelberg, J., Gao, P. and Parsons, C.A. (2012) Friends with money. Journal of Financial Economics 103(1): 169–188.
81. van Essen, M., Engelen, P.-J. and Carney, M. (2013) Does “good” corporate governance help in a crisis? The impact of country-and firm-level governance mechanisms in the European financial crisis. Corporate Governance: An International Review 21(3): 201–224.
Ryan, S.G. (2008) Accounting in and for the subprime crisis. The Accounting Review 83(6): 1605–38.
Although in early 2007 the market first realised the severity of the subprime mortgages problems, the credit crunch did not really begin until July 2007 (Ref. 88).
Bischof, J., Brüggemann, U. and Daske, H. (2011) Fair value reclassifications of financial assets during the financial crisis, http://ssrn.com/abstract=1628843 or http://dx.doi.org/10.2139/ssrn.1628843.
Corporate Governance Codes and Principles – Belgium (2004) Belgian corporate governance code, 9 December, http://www.ecgi.org/codes/code.php?code_id=154, accessed 16 June 2014.
Corporate Governance Codes and Principles – United Kingdom (2006) The combined code on corporate governance, 23 July, http://www.ecgi.org/codes/code.php?code_id=119, accessed 16 June 2014.
Corporate Governance Codes and Principles – Spain (2006) Unified good governance code, 19 May, http://www.ecgi.org/codes/code.php?code_id=244, accessed 16 June 2014.
Corporate Governance Codes and Principles – Finland (2003) Corporate governance recommendations for listed companies, December, http://www.ecgi.org/codes/code.php?code_id=36, accessed 16 June 2014.
Walker, D. (2009) A review of corporate governance in UK banks and other financial industry entities: Final recommendations, 26 November, http://www.ecgi.org/codes/code.php?code_id=270, accessed 16 June 2014.
Deloitte. (2013) Women in the boardroom: A global perspective, March, http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Risk/gx-ccg-women-in-the-boardroom.pdf, accessed 2 July 2014.
Public Limited Liability Companies Act § 6–11a.
For example, article 100(2) of the German Stock Corporations Act prohibits supervisory board members from serving on more than ten supervisory boards of any incorporated companies that are legally required to have a supervisory board, although up to five additional directorships are allowable for group companies.
Available at http://www.ecgi.org/codes/all_codes.php, accessed on 5 February 2014.
All the pairwise correlations are well below the threshold of 0.8 beyond which multicollinearity is considered a problem [e.g. Berry and Feldman (Ref. 101), Retherford and Choe (Ref. 102) and Gujarati (Ref.103)]. Regarding multicollinearity “(…) in practice the pairwise correlations usually tell most of the story (Ref 102, p. 40).
Yermack, D. (1996) Higher market valuation of companies with a small board of directors. Journal of Financial Economics 40(2): 185–211.
Berry, W.D. and Feldman, S. (1985) Multiple Regression in Practice. Newbury Park, CA: Sage Publications, Inc.
Retherford, R.D. and Choe, M.K. (1993) Statistical Models for Causal Analysis. New York: John Wiley & Sons, Inc.
Gujarati D.N. (2004) Basic Econometrics. 4th ed. New York: MacGraw-Hill.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Visnhy, R.W. (1998) Law and finance. Journal of Political Economy 106(6): 1113–1155.
Kaufmann, D., Kraay, A. and Mastruzzi, M. (2009 Governance matters VIII: aggregate and individual governance indicators 1996-2008. World Bank Policy Research Working Paper No. 4978, http://ssrn.com/abstract=1424591.
Spamann, H. (2010) The ‘antidirector rights index’ revisited. The Review of Financial Studies 23(2): 467–86.
As Erkens et al (Ref. 19) we use the legal institutions variable of Kaufmann et al (Ref. 106) and the antidirector index of Spamann (Ref. 107) because we want to utilise an index measured closest to the beginning of the financial crisis.
Djankov, S., McLiesh, C. and Shleifer, A. (2007) Private credit in 129 countries. Journal of Financial Economics 84(2): 299–329.
We also note that board busyness now has no impact on the performance of banks, contrary to CEO duality and board education which have a positive impact.
About this article
Cite this article
Fernandes, C., Farinha, J., Martins, F.V. et al. Supervisory boards, financial crisis and bank performance: do board characteristics matter?. J Bank Regul 18, 310–337 (2017). https://doi.org/10.1057/s41261-016-0037-5