What is the Impact of corporate governance on the performance of the banking sector?

Abstract

The main objective of this study was to analyze the importance of corporate governance in banking sector and its impact of performance of banking industry of Pakistan, with mediating role of Stakeholders Satisfaction. Empirical analysis will be used on primary data collected though research tool which will be designed to achieve the research objective. Finding, results, and conclusions will be given on the basis of empirical findings.

AIMS & OBJECTIVES

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Role of Corporate Governance in Banking Sector

The concept of corporate governance is key issue for the improvement of economic growth and efficiency. Top level management considered the corporate governance as tool to reduce the mismanagement or misconduct in organizational processes, and for the enforcement of regulation and management policies and decisions for protection the rights of stockholders & stakeholders in banking industry (Gompers et al., 2003). However, banks are considered as major sector in every economy, good corporate governance practices are necessity for banking sector especially for banking sector of Pakistan.

The corporate governance of banks is intricately tied to the corporate governance of firms with former enforcing discipline through proper due diligence of conduct of corporate and their financial, while proper governance at corporate level helps in safeguarding bank’s interests(Hanif, 2003). Pakistan ‘s banking sector experienced significant changes during the last few years moving from nationalized commercial banks to private banks. Given that the banking sector is the most important channel of resource allocation and mobilization in an emerging economy like Pakistan, a bank failure or banking sector collapse may have devastating effects on the economy(Zaidi, 1999). In the research thesis the attempt is to discuss and achieve these research aims;

The importance and issues of banking sector governance from Pakistan’s perspective.
Global experiences of banking governance are studied and the vulnerability of banking sector of Pakistan.
To ensure that good corporate governance practices have impact on the performance of banking sector.
To ensure whether corporate governance practices worsen or enhance the stakeholders’ satisfaction level.

Research Objectives

To assess the implementation level of corporate governance in the banking sector of Pakistan.
To analyzes the structure of good corporate governance practices (GCPG) and level of awareness about its new regulations.
To assess the impact of corporate governance practices on stakeholders satisfaction.
To assess whether the stakeholder satisfaction impact on the performance level of banking industry in Pakistan.

Hypothesis

H1a: Corporate governance practices have a stronger influence on stakeholder satisfaction.

H2a: Stakeholder satisfaction mediates the relationship between corporate governance performances of banking sector of Pakistan.

H3a: Corporate governance has a positive influence on performance of banking industry of Pakistan

BACKGROUND

“Corporate governance is a management process system which has been far and wide investigated, relatively little or no proper attention has been given or provided to the system or process through which organizations are operated or governed. If organizational management is considered as a management tool for business management, then governance is considered as tool to ensure that it is operating properly. All each level of organization managing and governance is required necessarily”(Tricker, 2000).

Governance is the focus of current efforts to improve life in its entirety, the production quality, efficiency in product delivery organization, and ensure best value for money. To govern is the execution, rule and dominate with authority in the policies and procedures of an organization. It stands to influence and determine the course of action, while specifying the method of control of events and activities so that products are optimized in terms of quantity, quality and speed(Khalid and Hanif, 2004).

Theory and practice tell us that there are many factors that shape the governance of a business organization. Therefore, companies need to be governed by a set of rules that reflect the interests of all stakeholders. These “rules of the game” for businesses are an important dimension of reform processes in both sophisticated/developed and developing economies alike Countries that ignore or delay in the reform of corporate governance will quickly be at a competitive disadvantage in attracting long-term capital for growth(Carney, 2005).

The importance of corporate governance for business success and for social welfare can not be overestimated. Recent examples of massive bankruptcies resulting from weak systems of corporate governance have emphasized the need to improve and reform of corporate governance at the international level.

(Corporate Governance and Accountability by Solomon, J.; Solomon, Aris. Publication: New York John Wiley & Sons, Ltd. (UK), 2004, page#1)

In current era, due to the recent big corporate scandals, the concept of corporate governance thrive the attention of corporate world as well interest of general public. It is necessary for the organizations to deal with internal and external matters, it also apparently important for the health of economic and social society and part of the world in general. However concept and definition of corporate governance is defined in poor manners because it creates the critical phenomena for the major portion of the economic world, and considered as challenge or somehow destructive for the organizational existence(Berglof and Pajuste, 2003).

It is important for the organizations to ensure the authority/ command of chain and accountability on the basis of delegated authority to certain individuals in organization, through the controls and rules and best practices to minimize or reduce the agency problems(Bies, 2002).

System of corporate governance has evolved over the centuries, often in response to corporate failures or systemic crises. The first well-documented failure of governance was the South Sea bubble in the 1700s, which revolutionized the laws and business practices in England. The developing world has also faced its own challenges for corporate governance. (By Iskander, Magdi R.; Chamlou, Nadereh Publication: Washington, DC World Bank, 2000 Corporate governance: A frame work for implementation, page#1)

Corporate governance however is the best tool to handle the business organizations, but the question is that how effective it is for the organization, at what extent the rules and regulations of the corporate governance affecting the organization.

RESEARCH DOMAIN

Research Design

Research design is mainly related to data collection and data analysis. The data will be collected from both direct and indirect sources and will be analyzed according using appropriate statistical tool.

Instruments & Tools

The target population in this research work will be the banking sector of Pakistan. Number of banks from banking industry of Pakistan will be considered as sample, sample size to study the impact of corporate governance practices on the performance of banking sector is 12 commercial banks. Sample will be collected through random sampling technique, and research tool will be used in this kind of study to collect the required primary data for the completion and achievement of aims & objectives of research study.

Quantitative Vs Qualitative

In such kind of study, both type of research can be possible, but the combination of both qualitative and quantitative will enhance the validity of data and finding with the due support of literature review. Qualitative research will facilitate the study through building the concepts of corporate governance and its importance in highly intensive & regulatory banking industry in Pakistan. To ensure the enforcement & implementation of corporate governance practices in banking industry of Pakistan and its impact on the organizational performance through mediating role of stakeholders satisfaction, will be conducted through quantitative research method, research tool will be used to collect the data and its validation and reliability will be measured through appropriate statistical software.

RESEARCH THEORY

The need for the concept of corporate governance arises & incorporated in business world when agency issues were arises in business world, and destruction of financial wealth and big organizations in consensus of agency issues. This kind of research study will consider the concepts of agency theory, managerial hegemony theory, Stewardship theory, external pressures, Stakeholder theory and other theories of convergence and post Enron theories has been studied in concern of this study

RESEARCH METHODOLOGY:

In this research topic, the researcher will conduct the combination of descriptive and evaluation research to provide further insight into the research problem by describing the variables of interest and measure the effectiveness and/or performance of the corporate governance to be successfully implemented and/or be able to achieve its objectives in banking sector of Pakistan.

Data Sources

Data will be collected from the following sources: 1. Questionnaire; questionnaire will be used as tool of data collection from the selected sample from banking industry of Pakistan, results will be interpreted and compare with the literature to ensure the validation of results. Other sources are; Articles, Books, Websites, Magazine journals, Annual reports relates to Banking Sector

Data Collection Technique

For gathering the data regarding the financial sector performance and corporate governance issues, the researcher may consult the various articles, journals, books, speeches, etc. which are available on the websites and the various reports prepared and presented by various organizations working for this research topic in Pakistan. Various empirical studies by many authors and researchers will be used for further insight into the research topic.

Data Analysis

The data collected from primary and secondary sources will be analyzed by using appropriate statistical tools to approve or disapprove the hypothesis.

PROBLEM STATEMENT

Likewise all over the world, in Pakistan too, the corporate governance has significantly improved over the past few years but much remains to be done which includes the removal of the obstacles to good corporate governance. The aim of the research thesis is to find out whether the Corporate governance is contributing towards the improved performance of Banking sector of Pakistan or not?

PROJECT PLAN

April

May

June

Week #:

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RESEARCH ACTIVITY
DATA RESEARCH
Proposed Research Topic
Problem Statement
Research Question
Introduction
Literature Review Articles, journals, & newspapers
Methodology
ANALYSIS AND CONCLUSIONS
Collection of data
Scanning of data
Coding and data entry
Data analysis
Limitations & Recommendations
References
Appendices

Research plan is tool which will be used to complete the research work in sequence and in step by step to achieve the objectives of study. Time Period required for completion of research work has been mentioned in weeks in X-axis and activities against the time line are given in Y-axis. Project plan is mainly segregated into two major parts 1. Data research, complete qualitative sort of data will be collected and arranged and literature review would be complete and the, 2. Analysis and conclusions, based on the data collection, scanning of data, coding and analysis and finally discussion and conclusion based on the finding.

RESOURCES & CONSTRAINTS

Resources available for the completion of study are based on number of sources; access to research articles, access to books, databases of research articles, access to digital libraries, other source of data will also be utilized in this one of kind study. Research constrains consist on; outdated data for literature review and concept building, only limited sources of data available to access the other databases are required in this concern. Data collected for research study may contain errors, or biasness from the respondent. Time limitation is one of major constraint in this study.

References
BERGLOF, E. & PAJUSTE, A. 2003. Emerging Owners, Eclipsing MarketsCorporate Governance in Central and Eastern Europe. Corporate Governance and Capital Flows in a Global Economy, 267–304.
BIES, S. S. 2002. Bank Performance and Corporate Governance. BIS Review.
CARNEY, M. 2005. Corporate governance and competitive advantage in family-controlled firms. Entrepreneurship Theory and Practice, 29, 249-265.
GOMPERS, P., ISHII, J. & METRICK, A. 2003. Corporate governance and equity prices*. Quarterly Journal of Economics, 118, 107-155.
HANIF, M. N. 2003. Restructuring of Financial Sector in Pakistan. Journal of the Institute of Bankers, Pakistan.
KHALID, A. M. & HANIF, M. N. 2004. CORPORATE GOVERNANCE OF BANKS IN PAKISTAN: A PROFILE. Centre for Management and Economic Research, LUMS.
TRICKER, B. 2000. Editorial: Corporate Governance–the subject whose time has come. Corporate Governance: An International Review, 8, 289-296.
ZAIDI, S. A. 1999. Issues in Pakistan Economy.
(By Iskander, Magdi R.; Chamlou, Nadereh Publication: Washington, DC World Bank, 2000 Corporate governance: A frame work for implementation, page#1)
(Corporate Governance and Accountability by Solomon, J.; Solomon, Aris. Publication: New York John Wiley & Sons, Ltd. (UK), 2004, page#1)

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