Board diversity has a positive impact on bank performance in times of financial turbulence
Cass research examines board diversity on the performance of EU-listed banks
Banks with boards which are more diverse in terms of gender, employee representation, internationalisation and age have higher and less volatile performance, new research from Cass Business School has found.
The researchers examined The performance effects of board heterogeneity: What works for EU banks? between 2007 and 2015 – during, and in the wake of, the global financial crisis. They considered standard board features (type, tenure, size, and age of board members) as well as board diversity features (gender diversity, employee representation, internationalisation, and age diversity). They also propose a diversity index, which summarises the different dimensions of diversity.
The researchers found:
- Board diversity does not seem to affect bank performance, but various diversity features (size, tenure, and employee representation) have a positive impact.
- Diversity decreases performance variability during crisis periods and in countries culturally more open to diversity.
- The relationship between board diversity and bank performance is non-linear: board diversity plays a bigger role in banks whose boards comprise a higher than average proportion of minority representatives
- Gender diversity does not impact bank performance
Lead researcher Professor Barbara Casu Lukac, Director, Centre for Banking Research at Cass Business School, said the research uncovered a complex relationship between board heterogeneity and bank performance, which is influenced both by market conditions and by national culture.
She said the global financial crisis emphasised flaws in bank corporate governance which played a key role in promoting and rewarding excessive risk taking.
“As a result of the financial crisis, many of the post-crisis governance reforms recommended boardroom diversity initiatives, for example that boards should enhance their effectiveness by recruiting more women and minority ethnic groups. Gender quotas were also recommended. We found overall board diversity does not seem to affect bank performance, but it did decrease performance variability during the Eurozone crisis and in countries culturally more open to diversity.
Professor Casu Lukac said the effect of diversity was more relevant when there is a significant proportion of minority representatives on boards.
“Overall board diversity decreased performance variability during the Eurozone crisis, particularly due to the positive incremental impact of foreign directors which might go to suggest that boards with a more diverse set of skills and experiences can be more effective during times of financial turbulence.
“While substantial board internationalisation has a negative impact on bank performance, the effect of foreign directors appeared to be overturned during the Eurozone crisis and in countries that are more welcoming towards diversity. However, the impact of minority directors on bank performance is constrained by their representativeness on the board and influenced by the cultural norms in the country where the bank is headquartered,” she said.
Professor Casu Lukac said the research suggested that differences in national culture across EU countries could be one of the reasons behind the differential impact of board diversity on bank performance.
“Our research supports recent policy initiatives aiming to foster board diversity. We now propose that government and policy makers consider establishing a diversity index, which summarises the different dimensions of diversity and which monitors progress on board heterogeneity,” she said.
Read the paper:
The performance effects of board heterogeneity: What works for EU banks? is published in the Journal of European Finance. The authors are:
- Professor Barbara Casu Lukac, Cass Business School
- Professor Francesca Arnaboldi, University of Milan
- Dr Elena Kalotychou, Cyprus University of Technology
- Dr Anna Sarkisyan, University of Essex
The paper recently won the Euronext Capital Markets Best Paper Award, sponsored by NYSE Euronext, at the 2018 European Financial Management Association Conference in Milan. It was also awarded the ADEIMF 2018 prize at the ADEIMF conference in Cagliari.