Board of directors' size and performance in the banking industry

Abstract

Purpose: This paper aims to investigate the relationship between board size and performance in a sample of 174 bank and savings‐and‐loan holding companies, over the period 1995‐2002.Design/methodology/approach: In order to examine the relationship between board of directors' size and performance in the banking industry, the paper uses various statistical tools, including panel univariate analyses and panel data techniques.Findings: Contrary to theories predicting that smaller boards of directors are more effective, increasing the number of directors in banking firms does not undermine performance. In contrast, the evidence is in favor of a positive relationship between board size and performance, as measured by Tobin's Q and the return on assets. The paper investigates whether this positive association is due to the fact that banks reduce the number of their directors in the aftermath of poor performance by testing for the relationship between board size and performance. The findings show that the number of directors leaving the board and the number of those joining the board for the first time increase following a poor performance, but the net change in board size is not affected by past performance.Research limitations/implications: The paper recognizes that a number of factors that are not controlled for in this study might be behind the positive empirical association between board size and the performance measures used.Practical implications: The results of this study suggest that the calls to reduce the number of directors in banks might have adverse effects on performance.Originality/value: This paper contributes to the banking literature by investigating the relationship between an important governance mechanism, the board of directors, and performance in banking firms.