The Impact of Genetic Diversity of Executive Board Directors on Corporate Misconduct: Evidence from US Banks

Abstract

We examine the link between the genetic diversities of executive board members and bank financial misconduct. The premise is that genetic diversity results in different perspectives, skills, and abilities that impact on the effectiveness of executive board guidance and monitoring, including with respect to misconduct. Employing a panel of US banks over 1998-2019 we find that adding directors from countries with different levels of genetic diversity is negatively associated with financial misconduct as measured by enforcements and class action litigation against banks by the main regulatory agencies. In addition, the relation between genetic diversity and misconduct is hump-shaped, suggesting that there a trade-off between the beneficial and detrimental effects of genetic diversity on board monitoring and guidance. These results are robust to controlling for bank specific variables, including other board characteristics, and to the use of instrumental variables.