Does Industry-Specific Expertise Improve Board Functioning? Evidence from Forced Bank CEO Turnovers

This study investigates whether independent directors’ expertise in the industry in which the firm operates improves board functioning. To assess the quality of board functioning, I examine firm performance following a CEO turnover. Using a sample of 173 bank CEO turnovers from 1995 to 2010, I find that the market responds more favorably to forced CEO turnover decisions when they are made by a board with more independent financial industry experts. I document that following a forced bank CEO turnover, improvements in bank performance are positively related to independent financial industry expertise on the board, while bank-risk taking is negatively correlated with such expertise. This is likely because a properly functioning board is particularly important when a forced CEO turnover becomes necessary, and industry-specific expertise greatly improves boards’ ability to locate a superior successor CEO and to monitor and advise new management in such a crisis situation. I do not find that board independence has a similar impact on bank performance or risk-taking.