Money & Banking

Board size matters for better performance of banks: study

Our Bureau Mumbai | Updated on October 28, 2020

IIM Professors working paper suggests that banks with larger board size and higher average sitting fees are closer to the efficiency frontier.

Empirical results suggest that board size of a Bank matters, with more board members exerting pressure for performance by better monitoring and control, according to a working paper put together by two IIM Professors.

“At the same time, they (more board members) bring a wide variety of expertise which are performance-enhancing. We also find that better performance is associated with higher compensation.

“High-powered incentives might motivate the board members to actively contribute in the monitoring and advisory roles,” said Abhiman Das, Professor, Indian Institute of Management (IIM), Ahmedabad and Balagopal Gopalakrishnan, Assistant Professor, IIM, Kozhikode, in the paper.

Their findings suggest that banks with larger board size and higher average sitting fees are closer to the efficiency frontier.

Larger board size positive for private banks

As per the analysis, which has a sample size of 38 banks for the period from 2008 to 2018, by the two academicians: “On one hand we find that larger board size improves the performance of the private banks (PBs).

“On the other hand, we find that the larger board size have a negative impact on the performance of the public sector banks (PSBs).

On an average, the performance of state-owned banks has been relatively low due to their high levels of profit inefficiency emanating primarily from allocative inefficiency, according to the paper, which examined the impact of board structure on the profit efficiency of Indian banks.

While the board size of the average bank in the sample is 10.47, the board size of the average PB and BSB is 10.19 and 10.67, respectively.

According to the paper, the average sitting fees of the board members in the sample is Rs 2.28 lakhs, with PBs’ fees about 5 times as large as the public sector counterparts.

As per the analysis, board members of PBs are on average busier in terms of other board memberships (4.2 other boards as compared to 0.9 in the case of PSBs).

Female board members

PSBs have on an average more female board participation (8 per cent) as compared to the PBs (6 per cent). PSBs have conducted more meetings per annum as compared to the PBs.

“On one hand, we find that PBs are able to attract female board members who seem to affect the overall performance of the bank.

“On the other hand, we find that PSBs are probably filling up the numbers to meet the criteria rather than seeking quality members to improve the performance of the bank,” the paper said.

Independent directors

The proportion of independent directors in private sector banks are 2.5 times as many as in the case of public sector banks.

“Our findings on the influence of independent board members on bank performance suggest that the private banks benefit from a higher proportion of such members.” the paper’s authors said..

The paper found a weak association between diversity and bank performance. Private sector banks tend to benefit from the presence of female board members and board members with high network potential.

“In a country with a high proportion of government-owned banks, it is imperative for the policymakers to provide a conducive environment for the efficient functioning of the bank boards.

“Empowering the boards can lead to a stronger governance structure that will facilitate better risk management and an efficient allocation of resources,” the authors said.

Published on October 28, 2020

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