Literature review
Introduction
Corporate governance refers to the organization by which a firm is governed and structured. The managers are responsible for the corporation’s ascendency. This aspect is common among bank and multinational companies. Stakeholders choose and employ managers to ensure corporate authority is executed. The board also set objectives, lead and supervise the management of the firm (Arora et al. 2016). The manner by which a corporation is governed has an influence on the financial performance of a bank institution. This is because corporate governance ensures effective commercial administration, which, in the long run, can deliver enormous financial success to a bank institution.
Relationship between corporate governance and bank financial performance
Size of board
Banks with good governance leads to streamlining processes in the organization when management functions are structured well. According to research by Akbar (2016), well-governed banking institutions have a large board of directors. A large board means that more expertise and a wide range of ideas during the decision-making and problem-solving process. This allows for better financial performable of corporations as compared to a small board. Additionally, external links and relationships exercised by a board of directors have a positive impact on the performance. These links enhance the firm’s long-term projections. Rose (2016) also identified that the relationship between board size and financial performance weakens as the size of the board grows. This means that increasing incremental costs occurs when the board grows from small to medium to large. Agreeably, Azez (2015) found that the inverse association between board size and performance is high for firms with large engaged boards. Challenged of poor communication and inefficient decision making impact the effectiveness of large boards, hence, compromising their financial performance. Conversely, large boards are less effective due to their inaccessibility and reduced coordination, resulting in reduced economic performance. Small boards are easy to coordinate and access as compared to the large boards.
Board diversity
Good corporate governance improves a firm’s stock return, hence, translating to higher financial performance. According to Akbar et al. (2016), the diversity of a board in governance has an impact on its financial performance. The multiplicity of the board increases board unconventionality as the members belong to different ethnicities and backgrounds. Diversity in management provides a variety of strategies to run the banking organization. There will be a diversity of ideas relating to innovation and activity in the board, hence, positively affecting financial performance. Members with different expertise and experience in management are more likely to join ideas together and manage the corporation successfully (Buallay et al. 2017). This automatically translates to an improvement in financial performance.
Board meeting frequency and financial performance
A board meeting is a platform set for deliberation on main issues amongst the members of the bard. This is to make crucial decisions for the growth of an organization. The diligence the board can be measured by the frequency of the board meetings by all board members. A study by Zabri et al. (2016) argued that the corporate board of directors is the core player in determining a firm’s financial performance. Regular board meetings are essential to a firm’s efficiency and effectiveness. There will be an increased ability to advise, monitor and create a disciplined environment when the board meets frequently. This improves financial success, therefore, attaining the objective of the stakeholders of increasing wealth generation. Furthermore, the frequency of board meetings contributes to the activeness of the board. The sessions allow the members of the board to gather continuous report and settle on strategic decisions concerning the organization (Arora and Sharma, 2016). Bank management must consider increasing the frequency of board meetings. This allows the members to be well informed about the essential activities, which contribute to strategic decision making. The quality of the sessions can also be considered.
Corporate governance strength of disclosure and firm performance
The strength of a firm’s governance system and the disclosure quality is equally imperative. Stakeholder put the focus on company reports and such reporting processes allow for improvement in structure and procedures in a corporation. Corporate disclosure is the communication of information between those inside the firm and outside investors. According to Pillai et al. (2018), disclosure plays a role in understanding the structure, policies, and performance. It also allows companies to react to any underlying problems in the economy on time. In a global economy, the standards of corporate governance must also be universal and attract international investments.
Financial reporting in banking institutions
Corporate disclosure through financial reporting is vital in aiding investors on decision making (Chen et al. 2016). A firm’s management may fail to conduct business reporting and present the information to potential investors. Without the disclosure of such information, the bank corporation’s condition cannot be understood. Exposure of fiscal reports allows stakeholders and market participants to value the progress of the corporation (Agyei-Mensah, 2018). Aside from assisting in decision making, financial reporting increases self-assurance in the market. When debts are hidden from the public, investors may not estimate their exposure to bankruptcy.
Research by Ciftci et al. (2019) showed that transparency in financial reporting assists the executive team to assess the effectiveness of management and apply corrective action where needed. Transparency can exist across all structures of a corporation other than fiscal accounts. This will provide the investors with information worth their investments and support of an organization. Roychowdhury et al. (2019) pointed out that the main pillars of corporate disclosure include truthfulness and materiality of information. Information disclosed by a firm must be material and timely. An accurate description of circumstances allows investors to make informed choices concerning the firm. Better disclosure reduces irregularities of information between the management of the firm and shareholders, therefore, mitigating agency problem. According to Arora and Sharma (2016), provision of financial disclosure voluntarily increases; liquidity share and reduces capital equity cost. In the banking sector, robust disclosure is vital in monitoring the market share and financial performance over a certain period of time. The confidence of the bank institution in the capital market can be achieved. However, the lack of disclosure-only leads to integrity losses in the market (Lozano and Serafeim, 2017). Bank institutions should avoid disclosing excess information to the public as it can impair the competitiveness obtained in the market. Transparency ensures that frauds and embezzlements are revealed, therefore, leading to efficiency in the allocation of resources (Young et al. 2018). Financial disclosure increases competitive advantage and is imperative in ensuring that good corporate governance takes place (Armstrong et al. 2015). Company objectives can also be disclosed in annual reports of a firm to allow for informed judgments concerning the management of a firm.
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