Committee Independence and Financial Institution Performance during the 2007-08 Credit Crunch: Evidence from a Multi-country Study

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: Using the data of the 20 largest financial institutions from G8 countries, we explore whether the performance is higher for financial institutions with more independent directors on different committees during the 2007-08 financial crisis. We also examine the moderating effect of a country-level civil law dummy and firm-level excessive risk-taking behaviors on the independence-performance relationships. Research Findings/Insights: The empirical evidence shows that the performance during the crisis period is higher for financial institutions with more independent directors on auditing and risk committees. The influence of committee independence on the performance is particularly stronger for civil law countries. In addition, the independenceperformance relationships are more significant in financial institutions with excessive risk-taking behaviors. Theoretical/Academic Implications: Our findings complement existing works to partially resolve the independenceperformance relationship controversies by exploring the independence of different committees. The moderating effects of civil law countries and excessive risk-taking firms further address the governance environment's role in the effectiveness of director independence. Practitioner/Policy Implications: Our results provide important policy implications for financial institutions. The regulation authorities should enhance regulation compliance to improve director independence, particularly for auditing and risk committees in banking industry. Independent directors in the banking industry are supposed to put more emphasis on excessive risk-taking behaviors, as the financial institutions profit from risk-bearing earnings.

Audit Committee Effectiveness and Company Performance: Evidence from Jordan

“…However, the independence of the audit committee chair may be of no use in enhancing the monitoring of management where the CEO is involved in the selection of directors (Carcello et al 2011). The independence of audit committee increases its strength, and reduces the agency problem and the opportunity for expropriation by insiders (Yeh et al 2011). Independence makes the committee more objective in monitoring the transparency of financial reporting; a committee unbiased toward the executive thereby reduces the agency problem between executives and other shareholders.…”

Strong boards, ownership concentration and EU banks’ systemic risk-taking: Evidence from the financial crisis

“…Likewise, Faleye and Krishnan (2015) find that board independence reduces the bank's riskiness measured as the borrower's long-term S&P credit rating and the inclusion of financial covenants in loan contracts, but it is not related to the bank's decision to diversify its lending risk through syndication. Finally, Yeh et al (2011) investigate if the performance during the recent financial crisis is better for financial institutions with more independent directors who sit on board committees. By analyzing data on financial institutions from the G8 countries, their results suggest that independence in auditing and risk committees is positively related to the crisis performance.…”

Board governance and corporate performance

“…Prior international evidence shows that the strengthening of the board independence and reduction of duality (consistent with the Code recommendations) are generally associated with a more effective board oversight function (e.g. Beasley, 1996;Boeker & Goodstein, 1991;Chan & Li, 2008;Conyon & Peck, 1998;Core, Holthausen, & Larcker, 1999;Dahya, McConnell, & Travlos, 2002;Weisbach, 1988;Yeh, Chung, & Liu, 2011). Hence the board governance index we develop is rooted in agency theory predictions (Fama & Jensen, 1983) and is supported by relevant empirical evidence.…”

“…The evidence suggests that board governance effectiveness often goes hand in hand with the quality and independence of key board monitoring committees (Chan & Li, 2008;Yeh et al, 2011). For instance, Shivdasani and Yermack (1999) show that when CEOs serve on the nominating committee or when there is no such committee, fewer independent directors are appointed.…”

“…Moreover, our finetuned approach allows us to focus on the quality of governance arrangements both at the board as well as at the subcommittee level. Chan and Li (2008) and Yeh et al (2011) highlight the importance of the monitoring committee composition in performing its oversight function. Hence, the board governance index we develop here is not only rooted in an established theory (namely agency theory), but the validity of its components is also supported by relevant prior empirical evidence.…”