Board Independence, Board Connections and US Government Troubled-Asset Relief Program (TARP) Funding for Banks

Abstract

Interconnectedness, or the ‘too connected to fail’ phenomenon has been used to explain the severity of the recent global financial crisis (GFC). Realising that the traditional linear approach to assessing risk is not sufficient, many firms are shifting their attention towards understanding how they are related to other firms. One method by which researchers are examining this is by establishing links between firms based on director connections. In this paper we add to this growing body of literature. We ask the question of whether financial institutions that received capital infusions under the Troubled Asset Relief Program (TARP) had less independent boards, after accounting for director connections, than other institutions (financial and non-financial). Our results provide strong evidence that this was the case. Specifically, TARP banks as we refer to them, had more independent boards prior to accounting for director connections, but less independent boards after accounting for concurrent and historic connections. Further examination into whether this relationship has any bearing on weak corporate governance is needed.

Keywords: Board independence, director connections, Troubled Asset Relief Program (TARP)