Bankers on boards: monitoring, financing, and lender liability

This paper investigates what factors determine whether a commercial banker joins the board of a non-financial firm and how a banker on the board affects the firm. We consider the trade off between the benefits of bank monitoring to the firm and the costs to the bank of becoming actively involved in firm management. On the one hand, smaller and more volatile firms with few tangible assets might benefit most from close bank ties. On the other, the U.S. legal doctrines \\"equitable subordination\\" and \\"lender liability\\" could generate high costs for banks which have a representative on the board of a client firm which experiences financial distress: a bank could lose its senior creditor status and become liable for losses to other claim holders. Consistent with an important role for these legal doctrines, we find that bankers tend to join the board of large stable firms with high proportions of tangible (\\"collateralizable\\") assets. This legal environment thus appears to reduce the role that banks play in U.S corporate governance and the management of financial distress, in contrast to Germany and Japan where these legal doctrines do not exist. We conclude with implications of our findings for the current regulatory reform debate over the expansion of bank powers.