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Value Creation, Risk Management and US Bank Holding Company Governance

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Author: William C. Handorf
Source: Global Journal of Management and Business Research: C Finance, Volume 18 Issue 3 Version 1.0 Year 2018
Download: https://journalofbusiness.org/index.php/GJMBR/article/download/2519/2420
Abstract:

The role and responsibilities of a corporate board of directors changed dramatically since the failure of Penn Central in the US in 1970 and the release of the Cadbury Report in Britain in 1992. We study the board structure of large, systemically important US bank holding companies after the crisis of 2007/09 to determine if the number and composition of directors or the number and mix of committees provide value for shareholders and enhance credit ratings. The US retains a rules-based system of corporate governance whereby publicly-traded banks must comply with laws and operate with both an audit and an enterprise risk committee. There are no formal rules applicable to the number of directors, diversity or leadership of the board or formation of other committees.

Holding company boards composed of more independent or female directors achieve better credit ratings consistent with adopting more conservative financial policies. Bank holding companies forming more committees, especially a finance/capital committee, retain a better credit rating and trade with a higher price/book valuation. Committee specialization enhances performance. An executive committee comprising a small subset of the board’s leadership may create an atmosphere of “elitism.” Yet, holding companies with such committees were priced with higher price/book valuations given the time and commitment of a small group chaired by the CEO to craft and implement a coherent business plan structured to increase return on equity and support future earnings growth.

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