The Impact of Board Structure on Bank Performance: Evidence from European Banks

Abstract

This study aims to investigate whether board characteristics of banking institutions affect their performance, using a panel data set comprising 45 banks and 270 bank-year observations in the European region over the period of 2010-2015. The study finds that there is a positive relationship between both the board size and the proportion of independent directors, and bank performance. Also, the study finds evidence that the gender diversity decreases bank performance. Interestingly, when it is tested for the presence of a non-linear relationship, the study finds an inverted U-shape relationship between both the board size and the proportion of independent directors, and the bank performance and a U-shape relationship between gender diversity and bank performance. The results show that the boards that are larger and not excessively independent are more effective in discharging their duties. Achieving the optimum mix of internal and external directors will result in the board becoming more efficient in their advisory and monitoring roles. Also, results shows that appointing female directors above a minimum threshold will improve bank performance, a finding that is consistent with the critical mass theory and supports the introduction of gender quotas as well. The findings of this study provide useful insights to policymakers in setting corporate governance regulations relating to board structures. The use of fixed effect estimation control for unobserved heterogeneity and the findings of the study are robust to alternative proxies of performance.