Did Board Configuration Matter? The Case of US Subprime Lenders

• Author: Krista B. Lewellyn,Maureen I. Muller‐Kahle
• Date: 01 September 2011
• Published date: 01 September 2011
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00871.x

Did Board Conf‌iguration Matter? The Case of

US Subprime Lenders

Maureen I. Muller-Kahle* and Krista B. Lewellyn

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: The origins of the global f‌inancial crisis have been attributed to the combination of a housing

price bubble and innovative f‌inancial instruments, as well as the lack of restraint by corporate executives and boards to

engage in excessive risk-taking. The rise in subprime lending between 1997 and 2005 played a crucial role in inf‌lating the

housing price bubble. We take a unique dataset of US f‌inancial institutions heavilyengaged in subprime lending and ask the

following research question: Did board conf‌iguration play a role in determining whether a f‌inancial institution specialized

in subprime lending?

Research Findings/Insights: We use a matched-pair sample of f‌irms in the f‌inancial industry from 1997–2005 with half of

the sample specializing in subprime lending and conduct panel data logistic regression analysis. We f‌ind that the board

conf‌igurations of those f‌inancial institutions that engaged in subprime lending were signif‌icantly different from those that

did not. Specif‌ically, subprime lenders had boards that were busier, had less tenure, and were less diverse with respect to

gender.

Theoretical/Academic Implications: This study uses the group decision making perspective in the context of subprime

lending to examine board of director conf‌iguration and its inf‌luence on decision making processesaround the issue of risky

subprime lending. Findings show that how boards were conf‌igured did inf‌luence the decision to specialize in subprime

lending. We f‌ind robust support for predictions based on the group decision making perspective.

Practitioner/Policy Implications: The deterioration of mortgage lending requirements that gave rise to the defaults of so

many subprime loans, in retrospect, appears to be something that should have been entirely preventable. By demonstrating

that subprime specialists had signif‌icant differences in boardconf‌iguration that impacted group decision making, this study

offers guidance to policymakers considering additional regulation and for corporate off‌icers examining corporate gover-

nance issues.

Keywords: Corporate Governance, Subprime Lending, Group Decision Making, Board of Directors, Board Busyness,

Board Gender Diversity, Board Tenure

“We almost invariably spent more time living with the

consequences of our decisions than we do in

making them” (Pfeffer, 1972:19). Group decision making has

been studied in the context of both top management teams

(Wiersema & Bantel, 1992) and the board of directors

(Amason, 1996; Forbes & Milliken, 1999). Scholars have

examined decision speed (Eisenhardt, 1989; Judge & Miller,

1991), decision quality (Amason, 1996;Atkinson & Atkinson,

2006; Dooley & Fryxell, 1999; Schweiger, Sandberg, &

Ragan, 1986; Stasser & Birchmeier, 2003), decision accuracy

(Hollenbeck, Ilgen, Sego, Hedlund, Major, & Philips, 1995),

and decision processes (Brodbeck, Kerschreiter, Mojzisch, &

Schulz-Hardt, 2007) in the context of top managementteams

and boards of directors.

Others have studied the dynamics of group decision

making within the board of directors and identif‌ied several

challenges confronting boards as they strive to be involved

in the strategic decision making process. Bainbridge (2002)

suggests that social loaf‌ing, where some members choose

not to actively participate in board decision making, and

herd-type behavior where a decision maker “imitates the

actions of others while ignoring his/[her] own information

and judgment with regard to the merits of the underlying

decision” can both be problematic issues that arise as boards

seek to be involved in strategicdecision making (Bainbridge,

2002:28). Groupthink has also been cited as a problem where

*Address for correspondence: Maureen I. Muller-Kahle, The Pennsylvania StateUni-

versity York, 1031 EdgecombAvenue, York, PA17403, USA. E-mail: mim10@psu.edu

405

Corporate Governance: An International Review, 2011, 19(5): 405–417

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00871.x