The paper under review studies the idea that directors’ expertise in financial matters and its impact on policy decisions. Further, it studies if the directors’ association with financial institutions hamper their advisory role. An assertion from the paper is that there is need for financial experts in boards as they have an appreciation of GAAPs rules and financial statements. Such an appreciation translates to better attendance to the welfare of shareholders.
From the paper, it is evident that when a firm has some of its directors coming from commercial banks, and the bank does carry out lending services to the firm, the result will be that the firm will get higher loans, display less investment-cash flow sensitivity, exhibit undesirable investment prospects and poorer returnsy. Consequently, firms that would otherwise have received the loan do not. This is an indication that creditors but not shareholders benefit from the lending.
Another finding is that firms that have investment bankers in their boards get into worst acquisitions. Additionally, the firms will always be focused on issuing grander bonds with lower underwriting fees in cases where the investment banker’s institution is not part of the transaction. As a result, the banker’s decisions is usually not catering for the interest of the shareholders.
A third finding focuses on experts in finance whose presence in boards is only to effect decisions that have a clear consequence for their home institutions. Otherwise, they would not really be keen to make decisions that do not have a consequence for their institutions.
Although it is difficult to completely measure the impact on shareholders’ value by having financial experts on firm’s boards, the paper posits that the quest for having financial experts as member of boards should be cautiously implemented as their impact on policy decisions is influenced by their firm’s interest which is usually in conflict with interests of shareholders.