Governance and the Financial Crisis

Should boards of financial firms be blamed for the financial crisis? Using a large sample of data on nonfinancial and financial firms for the period 1996-2007, I document that the governance of financial firms is, on average, not obviously worse than in nonfinancial firms. In fact, using simple governance scores and governance indices as measures, banks and nonbank financial firms generally appear to be better governed than nonfinancial firms. I also document that bank directors earned significantly less compensation than their counterparts in nonfinancial firms and banks receiving bailout money had boards that were more independent than in other banks. My results suggest that measures of governance that have been the focus of recent governance policies are insufficient to describe governance failures attributed to financial firms. Moreover, recent governance reforms may have to shoulder some of the blame placed on boards of financial firms.