THE BOARD OF DIRECTORS AND ITS INFLUENCE ON RISK PROPENSITY AND FIRM PERFORMANCE - An empirical study of their relations in the banking sector

The aim of this dissertation is to study the influence of differently composed boards of directors, on the firm performance and the companies’ risk propensity. Thereby, the boards of the fifty largest financial institutions worldwide over the period 2005-2008 are studied. The particular focus lies on the board composition variables percentages of female, ethnic minority and independent directors, as well as, average age of the board members and board size. The research is unique because the boards’ risk propensity is studied the first time. As its determinants act the measures debt-ratio and B.I.S. total capital ratio. Besides, the firm performance indicators return on assets and return on equity were completed by the share performance and the cost/income ratio. The results of the empirical research indicates that gender and ethnic diversity on the board, as well as, a higher number of outside independent directors and a higher average board age influence firm performance positively. Contrary to this, an increased board size has a negative influence on a bank’s financial performance. Considering the risk, a higher average board age, as well as, greater ethnic diversity and an increased number of independent directors have a negative relation to the risk propensity. Female directors and the size of the board are not connected to this measure. Another result was that during the year of the financial crisis the relations between the variables changed and there is no specific board composition that can withstand a situation like this exceptionally well compared to others