Board busyness, performance and financial stability: does bank type matter?

Abstract

This study examines the impact of board busyness (i.e., multiple directorships of outside board members) on the performance and financial stability of banks in a dual banking system (Islamic and conventional). We consider banks from 14 countries for the period 2010-2015. The results provide strong evidence that conventional banks with busy boards exhibit high bank performance (i.e., high profitability and low cost to income) and greater financial stability (i.e., low insolvency risk, credit risk, liquidity risk, asset risk, and operational risk). These findings are in line with the reputation hypothesis, which asserts that the expertise and connections of busy outside directors lead to better decision making, more efficient resource utilisation and more effective monitoring. In contrast, Islamic banks' performance and stability are adversely affected by the presence of busy board members, with Islamic banks show low profitability, high cost to income and high risk-taking. This result might be attributed to the complex governance structure of Islamic banks and the uniqueness of their financial products, which require additional effective monitoring.

Board busyness and new insights into alternative bank dividends models

“…According to the busyness hypothesis (e.g., Sharma 2011;Cashman et al 2012), busy outside directors are less likely to effectively monitor managers' risk-taking and expropriation behaviours for banks as they overstretch themselves across too many companies and spend less time on each board. Moreover, busy boards may not have sufficient reputational benefits to contribute to their institutions (Trinh et al 2020a). As such, an increase in their workload is closely associated with a decline in dividend payouts (Sharma 2011).…”

“…The 2007-2009 global financial crisis appears to have brought a more controlled operational environment to banking and increased complexity in governance with additional calls for effective monitoring by the board of directors. This was followed by increased public calls and support from policymakers in designing effective board governance in banks to create a more ethical and sustainable value and to align the interests of managers with those of shareholders and other stakeholders (Trinh et al 2020a). Although dividend payouts strategies have been investigated over 50 years, since Miller's seminal work (1958, 1961), it remains a 'puzzle' from an agency perspective.…”

“…Appointing a busy BOD (i.e., independent directors holding multiple board seats across many firms) can jeopardise the board's effective control over payout policies. In line with the resource dependence theory, effective monitoring by BOD is vital for efficient resource allocation and risk mitigation (Meng et al 2018;DeBoskey et al 2019;Trinh et al 2020a). However, an intense monitoring by boards is argued to be costly and complex for some institutions particularly in financial institutions (John et al 2015), and a busy board might be challenged to fulfil their supervisory/advisory roles due to the limited time/efforts available from working across several banks' boards (Fich and Shivdasani 2006;Trinh et al 2020b).…”

“…For example, board busyness might encourage managers to ex-post deviate from the payout policy and engage in poor or risky investment decisions. The negative impact of board busyness is likely to be more pronounced in Islamic banks than conventional banks (Elnahass et al 2020a;Trinh et al 2020a). Weak monitoring by the busy board can thus result in adverse selection and moral hazard problems on both sides of the balance sheet of Islamic banks (Visser 2009).…”

Editorial for EJF special edition policy actions & stability

“…The corporate governance of banks has drawn significant academic and policy attention, especially due to the failings during the GFC. Trinh et al (2019) investigate the influence of board busyness (namely, multiple directorships of outside board members) on the performance and financial stability of banks in a dual banking system (where Islamic and conventional banks operate). They study banks from 14 countries for the period 2010-2015.…”