Board of directors' size and performance in the banking industry

Abstract

PurposeThis paper aims to investigate the relationship between board size and performance in a sample of 174 bank and savings‐and‐loan holding companies, over the period 1995‐2002.Design/methodology/approachIn order to examine the relationship between board of directors' size and performance in the banking industry, the paper uses various statistical tools, including panel univariate analyses and panel data techniques.FindingsContrary to theories predicting that smaller boards of directors are more effective, increasing the number of directors in banking firms does not undermine performance. In contrast, the evidence is in favor of a positive relationship between board size and performance, as measured by Tobin's Q and the return on assets. The paper investigates whether this positive association is due to the fact that banks reduce the number of their directors in the aftermath of poor performance by testing for the relationship between board size and performance. The findings show that the number of directors leaving the board and the number of those joining the board for the first time increase following a poor performance, but the net change in board size is not affected by past performance.Research limitations/implicationsThe paper recognizes that a number of factors that are not controlled for in this study might be behind the positive empirical association between board size and the performance measures used.Practical implicationsThe results of this study suggest that the calls to reduce the number of directors in banks might have adverse effects on performance.Originality/valueThis paper contributes to the banking literature by investigating the relationship between an important governance mechanism, the board of directors, and performance in banking firms.

Corporate Governance and Accounting Performance: A Balanced Scorecard Approach

“…However, it contrasts with views emphasizing presence of independent directors on bank board for their ability to mitigate the agency problem and enhance performance due to their diversified experiences and qualification (e.g. Subrahmanyam et al, 1997;and Belkhir, 2009). Further analysis shows that increasing number of independent directors on bank board will have adverse effect on learning and growth and financial performance perspectives.…”

“…However, other studies suggest that larger banks have larger board size composed of more independent directors (e.g. Subrahmanyam et al, 1997;and Belkhir, 2009). Staikouras et al (2007) report that percentage of outside directors on banks boards ranges from a minimum of 16.67 percent to a maximum of 90.00 percent, with a mean of 64.40 percent in a sample of 58 large European banks from .…”

“…The literature on the relation between bank board size and performance suggests a significant relation (Zemzem, and Kacem, 2014). Many studies argue that large boards have positive effect on bank performance e.g., Subrahmanyam et al (1997), Andres and Vallelado (2008), and Belkhir (2009), and banking firms have larger boards than its non-bank counterparts (Booth et al, 2002). Adams and Mehran (2005) report an average board size of 18 directors (Note 1).…”

“…Literature on board independence can be classified into two groups of studies. One group encourages the presence of outsiders and argues that it has a positive effect on performance due to the effective monitoring of outsiders (Subrahmanyam et al, 1997;and Belkhir, 2009). The other group argues that insiders are more effective in enhancing firm performance due to their firm-specific knowledge and information (Coles et al, 2008), and suggest that independent directors decrease bank performance (Pathan and Faff, 2013).…”

“…Board size is measured as the number of directors on the board (Staikouras et al, 2007;Coles et al, 2008;and Belkhir, 2009). In financial firms, many studies documented that banking firms have larger boards that have positive effect on performance, for example, Subrahmanyam et al (1997), and Andres and Vallelado (2008).…”