Executive Board Composition and Bank Risk Taking

Abstract

Little is known about how socioeconomic characteristics of executive teams affect corporate governance in banking. Exploiting a unique dataset, we show how age, gender, and education composition of executive teams affect risk taking of financial institutions. First, we establish that age, gender, and education jointly affect the variability of bank performance. Second, we use difference-in-difference estimations that focus exclusively on mandatory executive retirements and find that younger executive teams increase risk taking, as do board changes that result in a Non-technical summaryThe socio-economical composition of a company's executive board is highly relevant for economic and social policy. For example, gender quotas are often advocated to improve career outcomes for females and 'break the glass ceiling'. Similarly, educational requirements for bank boards have been proposed in the past as a means to improve corporate governance.However, little is known about the effects on firm outcomes of having more female, more educated or older board members. Do female board members really force a less risky conduct of business? Do educated board members increase or reduce bank risk-taking? And does the age of executive board members matter?We construct a unique dataset for the entire population of German bank executive teams for the period 1994 -2010. Exploiting this dataset, we examine how the age, gender, and education composition of banks' executive boards affect bank risk taking. In our first test, we empirically establish that age, gender, and education affect the observed volatility of bank profits. In a second step, we compare banks which experienced changes in board structure to similar banks without such a change. Generally, changes in board structure could be symptoms of underlying trends in a bank's business model. For example, shareholders might appoint directors with similar views regarding the bank's optimal strategy. Such underlying trends would confound our analysis, as we would attribute the changes in risk taking to the new board structure. We circumvent this problem by only considering board changes due to the retirement of a board member. This strategy allows us to capture the impact of a younger, more female or more experienced board.We obtain the following key results. First, we show that younger executive teams increase risk-taking. Second, board changes that result in a higher proportion of female executives also lead to a more risky conduct of business. Third, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines. This has important policy implications: while quotas regarding the age, gender and education of an executive directly affect the representation of different groups on executive boards, they have a knock-on effect on corporate outcomes.

The impact of women leaders on environmental performance: Evidence on gender diversity in banks

“…Overall, in the banking sector “gender ties among women can mitigate gender‐induced entry barriers” (Berger et al, : 2094). Similarly, Berger, Kick, and Schaek (), relying on German banking sector, indicates that “women are more likely to be appointed to executive boards that are chaired by a female CEO” (Berger et al, :61). For these reasons, we test the gender homophily perspective on the critical mass of women on boards and women CEOs, by advancing the third and last research hypothesis:H3 A critical mass of women on the board of directors has a more positive impact on the environmental performance of banks when banks are led by female CEOs.…”

The Impact of Incentives and Communication Costs on Information Production and Use: Evidence from Bank Lending

“…Researchers also show that social ties between bankers (e.g., Berger, Kick, and Schaeck (), Berger et al ()) and ties between loan officers and borrowers (e.g., Uzzi (), Lehmann and Neuberger ()) can affect communication costs and banks’ use of information.…”

The effects of Shariah board composition on Islamic equity indices' performance

“…Moving from Ashraf (2016) Instead, we focus on the skills and education of Shariah board members as possible drivers of the screening criteria. We assume that differing education in terms of economic or law expertise can result in differing approaches to setting criteria (Berger, Kick, & Schaeck, 2014). In fact, criteria are derived from the Shariah, and differing education may lead to dissimilar views.…”