Bankers on Boards: Monitoring, Conflicts of Interest, and Lender Liability

Abstract

This paper investigates what factors determine whether a commercial banker is on the board of a non-financial firm. We consider the tradeoff between the benefits of direct bank monitoring to the firm and the costs of active bank involvement in firm management. Given the different payoff structures to debt and equity, lenders and shareholders may have conflicting interests in running the firm. In addition, the U.S. legal doctrines of "equitable subordination" and "lender liability" could generate high costs for banks which have a representative on the board of a client firm that experiences financial distress. Consistent with high potential costs of active bank involvement, we find that bankers tend to be represented on the boards of large stable firms with high proportions of tangible ("collateralizable") assets and low reliance on short-term financing. The protection of shareholder versus creditor rights under the U.S. bankruptcy doctrines may reduce the role that banks play in corporate governance and the management of financial distress, in contrast to Germany and Japan. We conclude with implications for the current bank regulatory reform debate, such as whether to permit banks to own equity in non-financial firms that, in turn, could allow them to mitigate the conflict.

Connected Lending: Thailand before the Financial Crisis*

“…We define the board connections in a similar manner to Kroszner and Strahan (2001a). Specifically, a firm has connections with the bank board when at least one member of the firm's board also serves on the boards of banks and finance companies.…”

“…To explore this issue systematically, we follow the methodology used by Strahan (2001a and2001b). We use a probit model in which the dependent variable is one if the firm has at least one person on its board serving on a bank's board or if the firm has a banker on its board.…”

Earnings management and internal mechanisms of corporate governance: Empirical evidence from Chilean firms

“…In this framework, banks play an outstanding role in the allocation of financial resources in detriment of capital markets (Allen and Gale, 2001; Beck and Levine, 2004) and can even become reference shareholders in many firms (Krozner and Strahan, 1999). As a consequence of the failure of the civillaw system to protect the interests of minority shareholders, Chilean firms rely on internal control mechanisms (Filatotchev and Mickiewicz, 2001).…”

Die ,,Geiselhaft‘‘ des Relationship-Intermediärs: Eine Nachlese zur Beinahe-Insolvenz des Holzmann-Konzerns

“…Als dominanter Kreditgeber hatte die Deutsche Bank einen starken Anreiz, in die Erlangung unternehmensspezifischer, vertraulicher Informationen zu investieren. Da Aufsichtsratsmandate nicht nur Einsichten in die Firmenspezifika gewähren, sondern auch Informationen über die Branche liefern (Kroszner und Strahan, 1999), muß die jahrzehntelange Rolle als Aufsichtsratsvorsitzender wohl als Teil dieser Investition in Informationsproduktion gewertet werden. Weder in der Theorie noch in der Empirie gibt es Hinweise darauf, daß ihre gleichzeitige Rolle als Anteilseigner diesen Anreiz hätte unterminieren können.…”