Purpose
This research empirically establishes that the interpersonal population diversity of executive board members partly explains the differences in financial misconduct across US banks. It advances the hypothesis that heterogeneity in the composition of an interpersonal population and diverse traits of board members, originating from the prehistoric course of the exodus of Homo sapiens from East Africa tens of thousands of years ago, is an important factor explaining the effectiveness of executive board monitoring with respect to a bank engaging in financial misconduct. The underlying intuition is that population-fragmented societies, characterized by mistrust, preference heterogeneity and corruption, find it difficult to sustain collective integrity action.
Methodology/ Findings
Employing a panel of US banks from 1998-2019 we find that adding directors from countries with different levels of interpersonal population diversity is positively associated with financial misconduct as measured by enforcement and class action litigation against banks by the main regulatory agencies. These results are robust to controlling for bank-specific variables, including other board characteristics, and to the use of instrumental variables. Furthermore, we document that the more population-diverse bank boards are more likely to commit misconduct, consistent with a mechanism of inter-generational transmission of cultural norms of mistrust and non-cooperation.
Practical Implications
The findings suggest that reducing financial misconduct by banks likely requires reducing the interpersonal population diversity of banks’ executive boards.