Bank ownership, board characteristics and performance: Evidence from commercial banks in India

Abstract

The role of governance mechanisms in determining bank outcomes has been studied mostly in the context of developed economies and focused mainly on private banks. In this paper we examine the importance of board size and board composition in determining bank outcomes using data from an emerging economy, India, and using a sample that includes both public and private banks. Relatedly, we also examine the effect of CEO tenure in influencing bank outcomes, a topic that acquires particular importance in context of public sector banks where the tenure of the CEO is relatively short. Using data that spans over ten years from 2003-2012 that witnessed a large number of governance reforms in India, the results of our empirical analysis suggest that while board size plays an insignificant role in determining bank outcomes, board independence plays a significant role. There is a strong ownership effect with board independence having a significant effect on performance of private sector banks and negatively impacting the performance of private sector banks. The analysis also reveals that longer tenure of the CEO has significant effects in improving bank outcomes both in terms of financial performance and asset quality. These positive effects strengthen in the later years of CEO tenure. Our results have governance implications for strengthening the composition of board of directors and CEO tenure, especially in publicly owned banks.