Composition, structure & risk-taking: A study on Danish bank boards 2003-2008

Abstract

The thesis at hand is motivated by the criticism directed at Danish banks’ boards in the wake of the financial crisis and poses the research question: “Have the structure and composition of Danish bank board affected risk-taking in the period from 2003-2008?” To answer this, the thesis constructs ten hypotheses in a deductive, comparative research design: six hypotheses regard the composition of Danish bank boards, four regard the structure. The thesis defines five groups of stakeholders, who are all affected by the bank’s actions: the shareholders, the board of directors, the management of the bank, the depositors and society at large. The hypotheses emerge from a thorough review of the corporate governance literature field with a special dedication to agency theory, as well as from extensive literature reviews on the theory and empirical research. The answer to the research question is found through the subsequent data analysis, built on 4.829 manually collected, unique data points. The thesis finds that the structure and composition of Danish bank boards in the period 2003-2008 has indeed affected risk-taking in Danish banks, because: • Independent directors are found to allow more risk-taking than dependent directors. • Experienced board members are found to allow less risk-taking than inexperienced (less than five years of board experience) • Directors with more than three simultaneous directorships are found to allow more risktaking than directors with three or less directorships • Directors are found to allow increasingly more risk as their years on the board increases • Directors with a master’s degree in finance, economics, business economics or accounting are found to allow more risk-taking than those without such an educational background • The existence of incentive programs (bonuses and stock (option) plans) is found to be positively related to risk-taking • It is found that if the CEO has been in place longer than the board on average, risk-taking has been increased relative to a situation in which the board has served longer than the CEO. “Gender” and “board size” are tested as well, but do not yield any results. The origins of the findings are then discussed at length, leading to a final part that draws up three models; an actuarial model that suggests pricing the banks’ risk insurance correctly, a soft-law model that recommends specific bank governance recommendations and finally, a society model in which a government representative is (re-) introduced to banks’ boards.