Reducing agency conflict between bank stakeholders: the role of independent-but-related directors

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We examine for a panel of European banks whether having a board structure that includes directors that are independent from insiders but related to non-controlling shareholders is effective in limiting expropriation by insiders, but also prevents excessive risk taking. We find that the inclusion of such “independent-but-related” directors increases bank board effectiveness for both controlled and widely held banks as it reduces the probability of default; it also decreases the cost of equity and results in higher market valuations for controlled banks. However, the inclusion of such directors is more likely to be successful if bank-level governance is accompanied by a strict supervisory regime.

Author(s):

Thierno Amadou Barry    
Laboratoire d'Analyse et de Prospective Economiques
France

Laetitia Lepetit    
Laboratoire d'Analyse et de Prospective Economiques
France

Frank Strobel    
Department of Economics-University of Birmingham
United Kingdom

Thu Ha Tran    
Laboratoire d'Analyse et de Prospective Economiques
France