Board composition, monitoring and credit risk: evidence from the UK banking industry

Abstract

This paper examines the effects of board composition and monitoring on the credit risk in the UK banking sector. The study finds CEO duality, pay and board independence to have a positive and significant effect on credit risk of the UK banks. However, board size and women on board have a negative and significant influence on credit risk. Further analysis using sub-samples divided into pre-financial crisis, during the financial crisis and post crisis reinforce the robustness of our findings. Overall, the paper sheds light on the effectiveness of the within-firm monitoring arrangement, particularly, the effects of CEO power and board independence on credit risk decisions thereby contributing to the agency theory.

CEO chairman controversy: evidence from the post financial crisis period

“…Applying an agency theory lens, Duality may compromise the efficacy of internal monitoring (Pi and Timme 1993;Chen and Al-Najjar 2012;Tang 2016). Effectively, Duality may usurp the power of the board and diminish its monitoring agenda (Lu and Boateng 2018).…”

“…Walker (2009) recommends that Chairmen must devote substantial time on board business, facilitating the board's decision-making on executive compensation, succession planning, and the recruitment of new directors. If the role of bank boards is to advise and monitor, then scrutinizing managerial actions for signs of excessive risk-taking is a key governance task (Linck et al 2008;Lu and Boateng 2018).…”

“…While poorly structured incentive schemes, high leverage levels and complex financial products played their role, all too often powerful bank Chief Executive Officers (CEOs) became the recognized face of excessive risk-taking gone wrong. Bank CEOs are well-placed to encourage excessive risk-taking (Fortin et al 2010;Lu and Boateng 2018). This study examines the potential for agency conflicts in the boardroom which may drive excessive risk-taking.…”

“…It also responds to those There are several distinctive features of this research. Overall, there is limited research focusing on bank governance structures (including Duality) and risk-taking (Srivastav and Hagendorff 2016;Sun and Liu 2014;Akbar et al 2017;Lu and Boateng 2018). Although Rediker and Seth (1995) call out for further empirical examination of Duality, little is also known about the interaction monitoring mechanisms (Krause et al 2014).…”

CEO Power and Board Structure of Banks: A Developing Country’s Perspective

“…Larger board offers greater access to external environment and as a result reduces external uncertainties faced by the bank. For example: Nakano and Nguyen (2012), Switzer and Wang (2013) and Lu and Boateng (2018) show that larger board reduces bank credit risks.…”