Multiple directorships

with firm financial performance. Shrader et al. (1997) explain the positive performance relationship by suggesting that these companies were recruiting from a relatively larger talent pool, and subsequently recruited more qualified applicants regardless of gender.

In a more recent study conducted by Richard (2000), the relationship between organization-wide diversity, business strategy and firm performance was examined in the context of the banking industry. Performance was measured by productivity return on equity, and market performance measured from 64 banks in three states. Study results showed that diversity added value and it was perceived as a relative competitive advantage for banks. In another recent work, Burke (2000) found significant correlation coefficients between the number of women directors and revenue, assets, number of employees and profit margins for Canadian firms. Therefore, the findings of the section above indicate that profitable firms may be amenable to diverse director appointments.

In summary, the research on the benefits/disadvantages of diversification point in opposite directions. It is noted that the causal relationships might be double-sided; perhaps diversity exists as a result of a good corporate culture and management performance or perhaps corporate culture and management performance are boosted as diversity increases.

The Danish Recommendations on Corporate Governance do not offer any explicit recommendations on diversity nor on female representation.

The hypothesis tested leans on the body of research that suggests that diverse knowledge could increase monitoring efficiency and alignment with shareholders and, as described, it uses gender as a proxy for diversification. Keeping the basic assumptions of the risk incentives in mind, this thesis reaches the following hypothesis:

Ho: There is no relationship between the representation and share of women on the board of directors and risk-taking in Danish banks

H3: There is a positive relationship between the representation and share of women on the board of directors and risk-taking in Danish banks

hypothesis” or a “busyness hypothesis” hold when hypothesizing the effect of multiple directorships held by one board member. While the two streams of thought are characterized by Jiraporn et al., they build on multiple sources and these are sourced where appropriate (Ferris, Jagannathan et al. 2003, Jiraporn, Kim et al. 2008).

The reputation hypothesis maintains that holding multiple director seats is an important signal and the hypothesis builds on arguments put forth by Fama (1980) (1980) and Fama and Jensen (1983b, 1980), who contend that the market for directorships works as an incentive for the individual director (with multiple seats) to develop good monitoring skills (ibid). Mace (1986) suggests that other directorships provide prestige, visibility and commercial contacts, thus hinting at the beneficial effects of having several directorships. It is found in other studies that the number of outside directorships has been used to represent the director’s reputation in the external labor market (Brown, Maloney 1999, Vafeas 1999).

The reputation hypothesis’ view on holding many board seats thus suggests that individuals who hold multiple board seats are – allegedly – high-quality executives, whose skills and experience are superior. Hence, they are able to relatively effectively monitor and oversee management and they take (or ratify) less value-destructing decisions (Jiraporn, Kim et al.

2008). Furthermore, the study hypothesizes that members with multiple seats are ‘hard-working’ individuals interested in their reputation as a decision expert; it can be inferred that this mechanism becomes stronger as the number of board seats increases – should the hypothesis hold true, that is.

Additionally, board members with many board seats are predicted to be placed on many boards because they are good at being a director. This is supported by the notion that the likelihood for outside directors to obtain additional board seats is related to the performance on the board in which they currently serve (Ferris, Jagannathan et al. 2003, Fich, Shivdasani 2006).

These findings lead to the measurable hypothesis (of Jiraporn et al. (2008), not this paper) that they engage in less value-destroying behavior. This final part of the hypothesis is in alignment with Shivdasani (1993), who employs the average number of additional directorships as a measure of director quality and find a negative association with agency problems.

The reputation hypothesis is countered by the busyness hypothesis. Shivdasani and Yermack (1999) assert that the number of outside directorships held by independent directors is important in determining firm value; although several outside directorships can be looked at as a signal of quality (Fama, Jensen 1983b, Fama 1980), independent directors with more than

three additional directorships will be looked at as too having little time to properly monitor the businesses he/she is directing, thus increasing agency costs (Shivdasani, Yermack 1999).

The underlying idea is that the monitoring function of the busy board member is poorly taken care of. Holding too many outside board seats may make the executive so busy that his or her ability to monitor management is compromised, resulting in less managerial oversight. As a result, managers – taking advantage of less effective oversight - engage in activities that enhance their own private benefits or activities at the expense of shareholders. For example, the inclination of managers to make acquisitions unnecessarily is documented widely(Jensen, Ruback 1990, Bradley, Desai et al. 1988, Bradley, Desai et al. 1988, Loderer, Martin 1990, Jarrell, Brickley et al. 1988)and this value-destructing activity is one of those that an effective board could mitigate.

Also an exhibit of potential value-destructing behavior by ‘busy’ directors is the report by Core et al. (1999), who contend busy outside directors provide CEOs with excessive compensation packages which in turn lead to poor firm performance. Markets have discovered this, apparently: Fich and Shivdasani (2006) find that busy directors are negatively associated with the firm’s financial performance.

This is consistent with the view of the NACD (1996) and the Council of Institutional Investors (2003) that adopted resolutions calling for limits on the number of directorships held by directors.

The Danish Recommendations on Corporate Governance state that: “ A member of the supreme governing body, who is also a member of the executive board of a company, should generally not take on more than a few non-executive directorships or one chairmanship and one non-executive directorship in companies not forming part of the group”. (DRCG, 5.7.1) (The Danish Commerce and Companies Agency 2005).

Finally, pointing in both directions, Sarkar and Sarkar (2009) note that the trade-off between expertise and knowledge gained from outside directorships vs. the time constraints on the individual director might exhibit non-linear features; it is suggested that some outside seats benefit the director’s ability to perform effective monitoring, while many might be detrimental.

Thus, the literature on whether directors holding many board seats is positive or negative in terms of his/her monitoring capabilities is somewhat mixed, but leaning in the busyness

hypothesis direction, pointing towards a notion that directors can only fully fulfill their monitoring and advising duties if they have relatively few boards seats.

Keeping the incentives for management outlined in section 4.6.3 in mind, and summarized as a either/or option to provide clarity, it is hypothesized in this thesis that:

Ho: There is no relation between holding more than three outside directorships by the individual board member and risk-taking in Danish banks.

H4: There is a negative relation between holding more than three outside directorships by the individual board member and risk-taking in Danish banks.