Research on Correlation between Heterogeneity & Faultlines of Board of Directors and the Risk Taking of Chinese Joint-stock Commercial Banks

Abstract

The board of directors is the final decision maker of bank risk preference and decisions. Board members have different age, education level, professional background and other characteristics. Due to the heterogeneity of these characteristics, different decisions will be made, which will affect the bank's risk-taking level to varying degrees. In addition, the characteristics heterogeneity of the board member further results in “faultlines”, which may lead to internal team conflicts and have impact on their decision-making quality, which could impact their risk taking further. In this paper, the board of directors of 15 Chinese joint-stock commercial banks during period from 2010 to 2017 were taken as the object of the research to carry out the empirical research on the relation between the heterogeneity & faultlines strength of board of directors and risk taking of Chinese joint-stock commercial banks from the dual visions of both upper echelons perspective and group faultlines theory. First, based on literature and theoretical research, two research hypotheses were proposed for the influence of board member heterogeneity and board faultlines on the risk-taking level of Chinese joint-stock commercial banks. Secondly, in order to verify the hypothesis, this paper established an empirical model and conducted empirical analysis on 120 sample data of 15 joint-stock commercial banks from 2010 to 2017. Finally, the empirical research results show that: (1) all heterogeneities of the board of directors in ages, education degree, and industrial background have negative influences on the risk taking of Chinese joint-stock commercial banks; (2) the professional background heterogeneity of the board of directors has no obvious influence on the risk taking of the banks; (3) the faultlines strength of the board of directors have positive influence on the risk taking of the banks. These achievements provide beneficial reference for optimizing the composing of board of directors of the Chinese joint-stock commercial banks.