In our paper, Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance? which was recently made publicly available on SSRN, we examine how board independence and the percentage of financial experts among independent directors relate to risk taking and performance of commercial banks during the period from 2003 to 2008, which includes the most recent financial crisis. During the most recent financial crisis, banks and other financial institutions have been accused of engaging in excessive risk taking. Because boards are ultimately legally responsible for all major operating and financial decisions made by the firm, the recent crisis has been viewed by many as a general failure of board governance in the banking sector.

The composition of the board of directors should be a reliable proxy of how well the board can process information provided by insiders and advise as well as monitor the bank’s risk taking practices in the best interests of its shareholders. This study highlights the fact that larger and more independent boards are associated with lower levels of risk taking. We also document, on average, low levels of financial expertise among independent directors. Although many calls for reforms pinpoint the lack of financial expertise of the board as a reason behind the crisis, we show that during the crisis both stock performance and changes in firm value are worse for large banks with more financial expertise among its independent directors. Large banks are defined in this study as those with a bigger balance sheet than the median commercial bank at the onset of the financial crisis.

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