Corporate Governance and Financial Performance of Commercial Banks in Ethiopia

Abstract

Corporate governance is an old age concept which provides for a set of transparent relationships between an institution's management, its board, shareholders and other stakeholders. This paper investigates the impact of corporate governance mechanisms on firms' financial performance using five years data from the year 2012 to 2016 with total population of the study consists of 19 banks operating in Ethiopia and using purposive sampling technique and select a sample of fifteen Ethiopian commercial banks. Return on asset was used as the financial performance indicator. Corporate governance mechanisms considered in this study include board size, frequency of board meeting, board gender diversity, availability of separate risk management committee in the board, and level of corporate governance disclosure. The study controls the effect of bank size and financial leverage. The Pearson Correlation and the regression analysis were used to find out whether there is a relationship between the corporate governance variables and firms performance. In examining the level of corporate governance disclosures of the sampled banks, content analysis was applied to determine the level of disclosure using un-weighted checklist and a disclosure index was developed by adapted from (Ranti U. O., 2011) which is guided by UNCTAD- ISAR (United Nations Conference on Trade and Development/International Standards of Accounting and Reporting) benchmark of corporate governance disclosure items, the NBE code and OECD code of corporate governance. The study therefore observed that a negative relationship exists between board gender diversity and availability of separate risk management committee and the financial performance of these banks, while a positive relationship was also noticed between frequency of board meeting and performance. Finally, the board size and level of corporate governance disclosure does not have a statistically significant effect. The study suggests that importance of increasing board meetings. Also, steps should be taken to encourage commercial banks to disclose corporate governance information. Keywords: Corporate Governance Mechanisms, Disclosure Index, Financial Performance, Commercial Banks and Ethiopia