What Board-level Control Mechanisms Changed in Banks Following the 2008 Financial Crisis? A Descriptive Study

Abstract

Following the 2008 financial crisis, the Financial Crisis Inquiry Commission (FCIC) identified major shortcomings in bank board governance, contributing to systemic risk management failures. This study adapts a management control framework and empirically examines changes in board-level “process control” and “input control” mechanisms in 95 large U.S. bank holding companies (2000–2015) and contrasts these with 1,452 nonbanks. Our findings indicate that most post-2008 improvements occurred in "process controls," e.g. Chief Risk Officer (CRO) appointments increased from 53% pre-crisis to 91% post-crisis, with significantly more banks establishing a dedicated risk committee and identifying the committee responsible for reputation management. We also find progress in "input control” related to domain knowledge with an increase of 16% in new bank directors with prior risk management experience, and significant increase in directors with other relevant domain knowledge. We observed limited or no change in control mechanisms related to improving the board members’ ability to voice different perspectives or commit more time to their role. Our results show that improvements in certain types of controls seem to have taken precedence over others which have implications for explaining and implementing changes in corporate governance and control mechanisms.

Keywords: banks, board of directors, financial crisis, management control, risk management, change management. JEL classification: G14, M40, M41

JEL Classification: m41, m48