The Role of Board Governance on Bank Performance

Abstract

This study uses a sample of 119 commercial banks in Asia (specifically China, Philippine, Indonesia, Japan, Malaysia and Thailand) to test the impact of board governance on the bank performance. The result reported based on OLS and within estimators. In addition, two step system estimator is employed in this study to solve endogeneity problem in corporate governance literature. The finding reported that bank with large board and more independent directors sit on board it help the bank to achieve higher performance. The result shows that bank can achieve better performance with younger directors. While CEO duality and female directors are insignificant to influence the bank performance. The result also reported that the higher loan losses provision leads to bank performance decline. This study employ various governance characteristics towards performance among banking sector in selected Asian countries. The result of this study highlight the effectiveness of the board as a functioning device in monitoring and advising manager.

How Corporate Governance Mechanisms of Banks Have Changed After the 2007–08 Financial Crisis

“…On the other hand, the activity in the banking industry is characterized by the complexity of the operations, which increases information asymmetry and diminishes the stakeholders’ capacity to monitor the decisions of bank managers (Gebba and Aboelmaged, 2016; Kose et al, ; Zakaria et al, ). According to Levine (), the opacity of banks has important governance implications.…”

“…According to Levine (), the opacity of banks has important governance implications. First, the asymmetry of information in the context of banking makes it more difficult for diffuse equity holders to control managers and for debt holders to control banks from risk shifting from shareholders to debt holders (Gebba and Aboelmaged, 2016; Zakaria et al, ). Second, opacity makes it more difficult to design effective incentive contracts.…”

“…In addition, the literature generally argues that the boards that are more independent, that is, with more directors without social or business managerial connections, should be more effective. However, board independence may not necessarily be beneficial for banks because independent directors may not have sufficient expertise to monitor complex banking firms and oversee the actions of the Chief Executive Officer (CEO) (Adams, ; Zakaria et al, ). Finally, block holders use their voting power to influence the way corporations are being governed (Becic, ). Board committees .…”

“…The global financial and banking crisis of 2007–08 has revealed the importance of enhancing understanding of bank governance (Gebba, ). Weak and ineffective corporate governance mechanisms in the banking sector can affect banks’ performance and economy as a whole (Zakaria et al, ) so that they were pointed out as the main factors that contributed to this crisis (Kirkpatrick, ; Marcinkowska, ). Thus, banks’ boards were blamed for what appear to be excessive pay packages that their executives received even while their firms were failing or being bailed out by the government (Adams, ).…”

“…Thus, banks’ boards were blamed for what appear to be excessive pay packages that their executives received even while their firms were failing or being bailed out by the government (Adams, ). Hence, the implementation of strong governance practices in the sector is essential to have effective bank systems what is critical to achieve and maintain a higher level of public confidence in the banking system (BCBS, ; Burlaka, ; Gebba, ; Levine, ; Zakaria et al, ).…”