Corporate Governance Structures and Financial Performance of Selected Indian Banks

Abstract

(ProQuest: ... denotes formulae omitted.)IntroductionThe Asian financial crisis of 1997 resulted in most Asian countries seeking to strengthen their corporate governance, transparency and disclosure levels (Ho and Wong, 2001). An effective system of corporate governance controls is considered crucial in aligning the interests of directors with those of shareholders. The board of directors has its key role in corporate governance. Their main responsibility is to endorse the organization.s strategy, develop a directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its shareholders, authorities and other stakeholders. The relative effectiveness of corporate governance has a profound effect on how well a business performs. The Board structure comprising of executive directors and independent directors (also known as 2-tier board) with mixed skills from varied background is recognized for their contribution in the organization.Executive directors have direct responsibilities to manage the company.s business and resources, while independent directors are responsible to bring an independent judgment to bear on the issue of strategy, performance and resources including the key appointments and standards of conduct. The field of independent directorship is in no way risk free; it should not be treated lightly. It carries significant exposures, financial liability, possible disqualification and consequential damage to future careers.An independent director legally bears the same responsibilities as the Executive Directors, but achieves effectiveness by influencing decisions rather than controlling operations. An independent director is a non-executive director on the board of a company who has integrity, expertise and independence to balance the interests of various stake holders. The idea of having them is to bring objectivity to board decisions and to protect general interests of the company, including that of minority shareholders. Independent directors are expected to improve the level of compliance of corporate governance of a company.The aim of this research paper is to study the effect, if any, of corporate governance structures, particularly board structure and CEO duality, on the performance of Indian Banks. Using samples of public and private banks operating in India, this research aims to examine the relationship between CEO duality and the proportion of independent directors on firm performance as measured by return on assets (ROA) and return on equity (ROE), using statistical techniques.Meaning of Corporate GovernanceBefore delving further on the subject, it is important to define the concept of corporate governance. The vast amount of literature available on the subject ensures that there exist innumerable definitions of corporate governance. To get a fair view on the subject it would be prudent to give a narrow as well as a broad definition of corporate governance. In a narrow sense, corporate governance involves a set of relationships amongst the company.s management, its board of directors, its shareholders, its auditors and other stakeholders. These relationships, which involve various rules and incentives, provide the structure through which the objectives of the company are set, and the means of attaining these objectives as well as monitoring performance are determined. Thus, the key aspects of good corporate governance include transparency of corporate structures and operations; the accountability of managers and the boards to shareholders; and corporate responsibility towards stakeholders. While corporate governance essentially lays down the framework for creating long-term trust between companies and the external providers of capital, it would be wrong to think that the importance of corporate governance lies solely in better access of finance. Companies around the world are realizing that better corporate governance adds considerable value to their operational performance:* It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience, and a host of new ideas. …

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