Governance and Bank Performance: Does Bank Risk Matter ?

Estu Widarwati; Soni Karmila; Nunik Nurmalasari

Governance and Bank Performance: Does Bank Risk Matter ?

Estu Widarwati, Soni Karmila, Nunik Nurmalasari

Abstract

Governance becomes a guideline for the banking management system and is essential for banking survival during regular economic crises. We investigate the impact of governance on performance in the Indonesians' conventional and examine the mediating role of bank risk in bank governance and performance relationship. The samples are 18 conventional banks listed on Indonesia Stock Exchange (IDX) from 2014 to 2021 and analyzed using panel data regression and sobel test. We find the risk of state-own bank higher than private bank and foreign bank that could leads to lower performance. Then the results indicate that board size and board age influence bank risk and bank performance. Banks should consider the board size for efficiency and also the maximum standard of their directors' age based on arguments related to innovation-based work productivity in the competitive banking industry. The subsequent exploration of banking governance research is needed by examining the differences in bank ownership and bank characteristics linked to bank risk which is strong evidence as mediation in this study.

JEL Classification: G20, G30, G32, G34

Keywords

governance; board; bank risk; Z-score; bank performance

References

Adams, R.B., & Ferreira, D. (2007). A Theory of Friendly Boards. Journal of Finance, 62(1), 217–250. https://doi.org/10.1111/j.1540-6261.2007.01206.x

Adam, R., & Mehran, H. (2003). Is Corporate Governance Different For Bank Holding Companies ? FRBNY Economic Policy Review, 9(1), 123-142

Adams, R.B. & Mehran, H. (2012). Bank board structure and performance: Evidence for large bank holding companies. Journal of Financial Intermediation, 21(2), 243-267.https://doi.org/10.1016/j.jfi.2011.09.002

Aebi, V., Sabato, G. & Schimd, M. (2012). Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 36(12), 3213-3226. https://doi.org/10.1016/j.jbankfin.2011.10.020

Abid, A., Ali, AG., Hussain, N., & Khuong, ND. (2021) Risk governance and bank risk-taking behavior: Evidence from Asian banks, Journal of International Financial Markets, Institutions & Money, 75(6), 1-19 https://doi.org/10.1016/j.intfin.2021.101466

Andres, P. & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of Banking & Finance, 32(12), 2570-2580. https://doi.org/10.1016/j.jbankfin.2008.05.008

Arosa, B., Iturralde, T., & Maseda, A. . (2013). The board structure and firm performance in SMEs: Evidence from Spain. Investigaciones Europeas de Direccio y Economia de la Empresa, 19(3), 127-13. https://doi.org/10.1016/j.iedee.2012.12.003

Berger, A. N., Kick, T. & Schaeck, K. (2014). Executive board composition and bank risk-taking. Journal of Corporate Finance, 28, 48-65 https://doi.org/10.1016/j.jcorpfin.2013.11.006

Bhatt, P. R., & Bhatt, R. R. (2017). Corporate Governance and Firm Performance in Malaysia. The International Journal of Business in Society, 17(5), 896–912. http://dx.doi.org/10.1108/CG-03-2016-0054

Cihak, M., & Hesse, H. (2007). Cooperative Banks and Financial Stability. Journal of International Monetary Funds, 07(2), np. http://dx.doi.org/10.5089/9781451865660.001

Dedu, V., Chitan, G. (2013). The Influence of Internal Corporate Governance on Bank Performance – an empirical analysis for Romania. Procedia-Social Behavioral Sciences, 99, 1114-1123. https://doi.org/10.1016/j.sbspro.2013.10.585

El-Chaarani, H. (2014). The Impact Of Corporate Governance On The Performance Of Lebanese Banks. The International Journal of Business and Finance Research, 8(5), 35-46

Francis, B.B, Hasan, I., & Wu, Q. (2012). Do corporate boards matter during the current financial crisis? Review of Financial Economics, 21, 39–52. https://doi.org/10.1016/j.rfe.2012.03.001

Goll, I., and Rasheed, A.A. (2005). The Relationships between Top Management Demographic Characteristics, Rational Decision Making, Environmental Munificence, and Firm Performance. Organization Studies, 26(7), 999–1023 https://doi.org/10.1177%2F0170840605053538

Guo, Z., & Kga, U. K. (2012). Corporate Governance and Firm Performance of Listed Firms in Sri Lanka. Procedia - Social and Behavioral Sciences, 40, 664–667. https://doi.org/10.1016/j.sbspro.2012.03.246

Hambrick, D.C., & Mason, P.A. (1984). Upper Echelons: The Organization as Reflection of Its Top Managers. Journal of Management Reviews, 9 (2), 193-206. https://doi.org/10.5465/amr.1984.4277628

Jensen, M.C., & Meckling, WH (1976) Theory of the Firm: Managerial Behavior, Agency Cost, and Ownership Structure. Journal of Financial Economics, 3, 305-360. https://doi.org/10.1016/0304-405X(76)90026-X

Josephine, B.J., & Joseph, C. (2015). Corporate Governance Mechanisms and Bank Performance: Resources-based View. Procedia Economics and Finance, 31, 117-123. https://doi.org/10.1016/S2212-5671(15)01138-7

Karar, S.K., Ali, J., Bilal, M., Tahir, M., Bahadar, N., Bukhari, H., Ullah, S., & Aziz, T. (2021). Corporate Governance, Risk Management, and Bank Performance: Does Type of Ownership Matter? Journal of Financial Risk Management, 10(03), 342-346 http://dx.doi.org/10.4236/jfrm.2021.103020

Lukviarman, N. (2016). Corporate Governance. GRP Strategic Seri, PT. Era Adicitra Intermedia. Solo.

Pathan, S. (2009). Strong boards, CEO power, and bank risk-taking. Journal of Banking & Finance, 33(2), 1340-1350. https://doi.org/10.1016/j.jbankfin.2009.02.001

Rahman, Md.A., Islam, J. (2018). The Impact of Corporate Governance on Bank Performance: Empirical Evidence from Bangladesh, Global Journal of Management and Business Research C Finance, 18 (8), 49-54. ISSN: 2249-4588 & Print ISSN: 0975-5853

Sheikh, N.A., Wang, Z., and Khan, S. (2011). The Impact of Internal Attributes of Corporate Governance on Firm Performance: Evidence from Pakistan. International Journal of Commerce and Management, 23(1), 38-55. https://doi.org/10.1108/10569211311301420

Shuying, W., Shuijuan, Z., and Bobo, l. (2017). Effect of Diversity on Top Management Team to The Bank Innovation Ability Based on The Nature of Ownership Perspective. Procedia Engineering, 174, 240-245. https://doi.org/10.1016/j.proeng.2017.01.126

Wiersema, M.F., and Bantel, K.A. (1992). Top Management Team Demography dan Corporate Strategic Change. Academy of Management Journal, 35(1), 91-121. https://doi.org/10.2307/256474

Zhuang, J., Edward, D., & Capulong, M.V.A.. (2001). Corporate Governance and Finance in East Asia. The Asian Development Bank, 2, n.p http://hdl.handle.net/11540/6222

Full Text: PDF

DOI: 10.15408/etk.v21i2.24364