Board busyness and new insights into alternative bank dividends models
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Board busyness and new insights into alternative bank dividends models Vu Quang Trinh1 · Marwa Elnahass1 · Aly Salama2
© The Author(s) 2020
Abstract This study examines the possible opposing effects of the board function of busyness (i.e. the presence of busy independent non-executive directors serving on multiple boards) on bank dividend payout patterns between two alternative payouts models (i.e. conventional and Islamic). Using an international sample for listed banks during the periods of 2006– 2018, we show that the busyness of boards of directors can explain differential dividend payouts behaviour between two banking systems. For conventional banking dividend model, a busy board has a significantly positive impact on the bank’s dividend payout level. However, during the financial crisis of 2007/2009, the positive impact of board busyness on dividends payouts is tempered for these banks. In contrast, Islamic banks operating under a more constrained dividend model, report significantly lower levels of payouts and lower likelihood when they have busy directors on board. We find insignificant evidence for the effect of the financial crisis in Islamic banks. These results highlight a potential challenge for the unique agency conflicts arising from the complex payout model of Islamic banks (in terms of profit distribution principles, motives, mechanics and techniques, and flexibility of payouts), which is subject to the demand for greater monitoring and additional rulings when compared to the conventional. Keywords Busy boards · Dividends policy · Bank type · Payouts model JEL Classification C23 · G01 · G21 · G28 · L50 · M4
1 Introduction The 2007–2009 global financial crisis appears to have brought a more controlled operational environment to banking and increased complexity in governance with additional calls for effective monitoring by the board of directors. This was followed by increased public calls and support from policymakers in designing effective board governance in banks to create a more ethical and sustainable value and to align the interests of managers * Vu Quang Trinh [email protected] 1
Newcastle University Business School, Newcastle University, Newcastle upon Tyne, UK
2
Newcastle Business School, Northumbria University, Newcastle upon Tyne, UK
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with those of shareholders and other stakeholders (Trinh et al. 2020a). Although dividend payouts strategies have been investigated over 50 years, since Modigliani and Miller’s seminal work (1958, 1961), it remains a ‘puzzle’ from an agency perspective. Dividend payout is an implicit governance tool in reducing agency costs between shareholders and managers (Sharma 2011; Onali et al. 2016; Mulyani et al. 2016). This is because the monitoring needs of capital providers are lower since the amount of free cash flow is reduced after distributing dividends, leading to a lower probability of managers wasting excess available cash (e.g. DeAngelo and DeAngelo 2000; Harford et al. 2008). In line with
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