Accounting Research and Audit Practices | Journals

The IUP Journal of Accounting Research and Audit Practices:

Effect of Overworked Directors on Firm Performance: Evidence from Indian Banks

Article Details

Pub. Date	: July, 2023
Product Name	: The IUP Journal of Accounting Research and Audit Practices
Product Type	: Article
Product Code	: IJARAP020723
Author Name	: Rekha Handa and Priyanka Mahajan
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 21

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Abstract

The study examines the impact of executives having multiple directorships on the financial performance and asset quality of banks. The research has been carried out on 36 banks operating in India over a 19-year period (2001-2019) using an unbalanced panel implementing fixed effects model, with statistical evidence demonstrating its applicability. The study finds a positive significant effect of multiple directorships on bank performance, thereby confirming the "quality hypothesis" that busy directors are more likely to be better directors. In addition, it also finds significantly negative effect of multiple directorships on gross nonperforming asset ratio. Furthermore, the findings also reveal that larger board size and CEO duality are positively associated with a firm's profitability, which helps to improve the asset quality of banks, and the total number of committees is inversely associated with the profitability of the firm. Overall, the findings suggest that despite the strain that many directorships may impose on directors, busy directors bring in more experience, knowledge, abilities and network that enhance the value of the firm. In sum, the findings imply that board effectiveness, as assessed by numerous directorships, is an important aspect of board operations.

Description

The Board of Directors is in charge of overseeing and advising the CEO, and is usually appointed by businesses to help them acquire a competitive advantage. It is an essential component of Corporate Governance (CG). Literature has traditionally focused on two aspects of the Board of Directors, namely, board composition and size, and the effects of these board attributes on firm performance (Yermack, 1996; and Coles et al., 2008). Complex firms, which require more consulting and monitoring, are thought to have a larger Board of Directors and more outside directors (Coles et al., 2008). However, scholars and practitioners alike have recently focused on the issue of numerous directorships. Several recent studies have investigated the impact of 'busy' or 'over-boarded' directors (directors that serve on