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    Bank Boards: What Has Changed Since the Financial Crisis?
    08 May 2019Working Paper Summaries

    Bank Boards: What Has Changed Since the Financial Crisis?

    by Shiva Rajgopal, Suraj Srinivasan, and Forester Wong
    Since the 2008 financial crisis, bank boards have not improved their cultural or gender diversity compared to other companies, nor are they better qualified than before the crisis. Outside directorships of bank directors and the extent of CEOs also being Chairman also remains the same. However, there is some evidence of better risk oversight both from managers and the board.
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    Author Abstract

    Several government-mandated committees investigating the financial crisis highlighted four key deficiencies in the composition of bank boards before the crisis: (i) group think among bank board members; (ii) absence of prior banking experience of board members; (iii) inability of board members, especially of the chairperson, to devote time to understanding the bank’s business model, and (iv) inadequate emphasis on risk management. Our empirical analysis compares proxies for these deficiencies between 97 U.S. banks and 1,297 nonbanks before and after the crisis covering the years 2007–2015. We also introduce control variables that would have affected these proxies, regardless of the crisis. Based on such an analysis, we do not find (i) a significant difference in the proportion of directors that has turned over from bank boards since 2007 relative to boards of 1,297 firms in other industries; (ii) that banks are staffed by more successful leaders relative to before the crisis; (iii) evidence of greater gender or racial diversity in bank boards or of a greater split between the chairperson and CEO’s position or of an increase in the number of directors appointed outside of the current CEO’s tenure in the post crisis period, relative to nonbanks; (iv) that the number of outside board seats of bank directors, a measure of time commitment, has fallen after the crisis, and (v) that a bank's chairperson is less likely to sit on at least one outside board, relative to before the crisis. Virtually every bank now has a Chief Risk Officer (CRO) but the CRO is unlikely to feature among the top five most compensated employees of the average bank. The number of banks that have an independent risk committee and a committee devoted to reputation management has increased since the crisis. In sum, bank boards seem to have responded modestly to the financial crisis.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: April 2019
    • HBS Working Paper Number: HBS Working Paper #19-108
    • Faculty Unit(s): Accounting and Management
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    Suraj Srinivasan
    Suraj Srinivasan
    Philip J. Stomberg Professor of Business Administration
    Unit Head, Accounting and Management
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