Implications for Bank Risk When Directors Are Related to Minority Shareholders

Using a panel of controlled European banks, we examine whether board structures that include directors that are related to minority shareholders can be an effective corporate governance mechanism to limit expropriation by controlling shareholders, without exacerbating risk. We find that the inclusion of such minority directors does indeed increase the effectiveness of bank boards as it results in higher market valuations without increasing risk. Our results depend crucially on whether or not minority directors are related to “active” institutional investors, the extent of holdings of related shareholders, as well as the strength of the supervisory regime