Do bank independent directors make any difference?

The presence of independent directors on bank boards has not curtailed risk-taking at the majority of the world’s largest banks since the global financial crisis, research has shown.

Academics at Leeds University Business School and Hull University Business School looked at the number of independent directors on the boards of more than 260 of the world’s largest banks and whether institutions with more independent directors took a more prudent approach to business before and after the global financial crisis.

The research shows that risk-taking following the crisis has been curtailed only at banks which received a public bail-out - for the majority of banks, the presence of independent directors had no discernible effect on risk-taking.

Independent directors were seen as having an important role in safeguarding the interests of bank creditors and taxpayers in the aftermath of the financial crisis through scrutinising management decisions and ensuring that institutions acted more prudently.

But the research raises questions about the role of independent directors post-crisis and whether they are fulfilling their role in helping to safeguard against another crisis.

Lead author Francesco Vallascas, Professor of Banking at Leeds University Business School, said: “Recent regulatory documents suggest that independent directors should represent stakeholders’ interests and, for a number of leading global banks, this includes taxpayers following the billion dollar public bail-outs that some received.

“Independent directors should ensure that banks act more prudently, and don’t engage in the so-called ‘casino-style’ activity which caused so many problems in the global crisis.

“But this analysis shows that only in those banks which received a public bail-out had independent boards curtailed risk-taking following the global crisis. For most banks, having independent directors made no difference to their exposure to risk.”

The study measures risk by looking at the probability that a bank might default, the volatility of bank share prices and the likelihood that a bank might suffer a major loss.

A total of 262 banks were analysed, including 54 which received government financial support during the crisis.

While the figures initially appeared to show that the presence of independent directors was linked to reduced risk-taking after the global financial crisis, closer analysis showed that this effect was seen only in institutions which received a public bail-out.

Professor Vallascas said that the results raised questions about the value of independent directors: “Banks which received a public bail-out are under additional scrutiny and it is unsurprising that these institutions take a more risk-averse approach. But for the majority of banks, it is highly questionable whether the independent directors do act as safeguard.

“This raises questions about the role of independent directors and whether they are meeting their responsibilities. Are they really holding management to account? Are they asking the difficult decisions which need to be asked if are trying to ensure financial stability?”

The paper, ‘Does the impact of board independent on large bank risks change after the global financial crisis?’ by Professor Francesco Vallascas and Professor Kevin Keasey, Leeds University Business School, and Professor Sabur Mollah, Hull University Business School, is published in the Journal of Corporate Finance. A copy is available upon request.

Professor Vallascas is available for interview.