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The issue of corporate governance has been increasingly popular in recent years.
Corporate governance is considered to be one of the most critical factors influencing firm performance and in banking sector it is particularly important as banks
play a specific role in the economic system through the way it facilitates capital
allocation and help minimize risk for businesses.
This paper is aimed at filling the gap by presenting the issue of bank corporate
governance in terms of both theoretical framework and empirical study. In the theoretical framework, the research provides readers with the fundamental aspects of
corporate governance in general and bank corporate governance in particular with
two popular frameworks. The empirical study presents a selection of banks for the
sample and uses econometric models to test the effect of several corporate governance variables on bank performance. From the result of the reseach, it has been
found out that the number of members in Board of Director and the ratio of Capital
Adequacy have great influence on the performance of the Vietnamese commercial
banks.
Keywords: Bank performance, board size, capital adequacy ratio, corporate
governance, board composition.
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1. Introduction
Nowadays, corporate governance is a subject of paramount importance and utmost popularity. It is popular because recent scandals
have proved that todays state-of-the-art
mode of governance is indeed inadequate. If
corporate governance is essential to the success of almost any firm in almost any country,
that issue turns out to deserve much more special attention in the banking sector.
Given the ultimate goal of almost any business is to maximize shareholders wealth; it
cannot be denied that sound corporate governance is a prerequisite condition to ensure that
the corporate objective is achieved. As a result,
corporate governance in general and bank corporate governance in particular have inspired a
great number of theorists and researchers. In
fact, there has been a great deal of attention
given to these interesting issues on various
national and international levels.
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- Corporate governance concerns the methods (structure) through which defining a corporations goals and the methods for reaching
those are monitored periodically.
- Corporate governance manages regulations
among all corporation stakeholders, with the
ultimate objective of resolving conflict of interest between owners and managers.
Agency theories
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and play the central roles in governing the corporation to ensure all business goals are
obtained and shareholders wealth are maximized are: Shareholders, Board of Directors
and daily in charge personnel often referred as
CEOs or Executive Board (Barger, 2004).
Besides organizational, human and information assumptions sorted in the above-presented table, there is also a critical need to
address other 3 primary assumptions applicable to the agency theory as they set an important base for the differentiation of special bank
corporate features from normal corporate governance in later parts. These include:
- Normal/Competitive markets
Friedman (2006) states that the organization itself should be thought of as grouping of
stakeholders and the purpose of the organization should be to manage their interests, needs
and viewpoints, based on some ethical principle. This stakeholder management is thought
to be fulfilled by the managers of a firm. The
managers should on the one hand, manage the
corporation for the benefit of its stakeholders
in order to ensure their rights and the participation in decision making and, on the other
hand, the management must act as the stockholders agent to ensure the survival of the
firm to safeguard the long term stakes of each
group. All the mentioned thoughts and principles of the stakeholder concept are known as
normative stakeholder theory.
Stakeholder theory
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The descriptive stakeholder theory is concerned with how managers and stakeholders
actually behave and how they view their
actions and roles. However, the instrumental
stakeholder theory deals with how managers
should act if they want to favor and work for
their own interests. In some literature, personal self-interest is conceived as the interests of
the organization, which is usually to maximize profit or to maximize shareholder value.
This means if managers treat stakeholders in
line with the stakeholder concept the organization will be more successful in the long run.
Stewardship theory
One of the most well-known pieces of literature giving standards to ensure good corporate governance for banking systems worldwide worth being mentioned is the New Basel
Accord, called Basel II issued by the Basel
Committee. It contains the first detailed
framework of rules and standards that supervisors can apply to the practices of senior
management and the board for banking
groups. Pillar One of Basel II specifies capital
requirement to ensure banks against risks.
Pillar Two seeks to address the problem by
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providing both internal and external monitoring of bank corporate governance and riskmanagement practices while Pillar Three
addresses corporate governance by focusing
on transparency and market-discipline mechanisms.
of independent members does not show a significant relationship with performance, companies with boards dominated by outsiders
show a better performance (Adam and
Merhan, 2008). In addition, the type of relationship between board size and bank performance in Vietnamese banks will examined
later in the empirical part of this research.
In terms of external bank corporate governance mechanisms, market control and regulatory system become central roles in the
stage. However, in the banking context, mar-
EXTERNAL BANK
CORPORATE
INTERNAL BANK
CORPORATE
Management
Structure
Market
Control
Ownership
Structure
Regulatory
System
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- Capital requirement
- Ownership structure
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Corporate
governance
Risk Management
Bank Performance
Both bank performance and risk management are dependent on implementing good
corporate governance; hence, the two constructs are interrelated by nature.
Interrelationship between the two represents
the risk and return trade-off. When bank managers manage their risk better, they will gain
an advantage to increase their performance.
As a consequence, better bank performance
will likely increase bank reputation and public
image, allowing banks to take advantage of
the lower cost of risky capital and other
sources of funds
useful to explain the relationship between corporate governance and risk management. The
interested parties are not only concerned
about earning better return on their investment
but are also concerned over how the bank risk
exposure is distributed to them. Thus, better
implementing good corporate governance is
not only attached to raising expected return
but also better risk management. Banks face
various risks such as interest risk, market risk,
credit risk, technological and operational risk,
liquidity and insolvency risk. Management of
these types of risk are determined by mechanisms of corporate governance in the banking
sector through different points of views, most
of which focus on the role of regulations and
regulators. One famous measure of risk management, regulated banks is the Capital
Adequacy Ratio (CAR), which measures bank
capital over the risk-weighted assets.
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We also base the current study on the structure of two main theoretical frameworks in
bank corporate governance discussed in previous part (Internal and External by Macey and
OHara (2001) and Triangle Framework by
Tandelilin et al. (2007)). In addition, this
study is also partially based on the complex
regression model by Praptiningsih (2009).
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The correlation matrix between our variables both independent and dependent is presented in Table 1 in the Appendix. After
checking the correlation, we conducted the
regression test. We first conducted the test
with the general model of one dependent variable ROE and the three main independent
variables namely: board size, CAR and
FOWN. After that, we discuss the results of
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the general model. We then conducted the second test to check the board composition and
ROE relationship.
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(4)
the one in equation (4). It means that the participation of foreign ownership adds no value
to the bank performance and our proposal to
drop the variable FOWN is relevant.
before testing.
the entire equation as well as make the comparison with previously related research.
with a larger board such as an enlarged provision of valuable advice and networks. A
larger board could also favor better decisions
competencies
experiences.
In
skills and diversified knowledge from different directors in the board. Furthermore,
and
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Secondly, a negative but quite small coeffcient of CAR signifies a negative relationship between capital adequacy and return on
shareholders investment. In fact, this may be
Journal of Economics and Development
86
profitability.
The last question is to test the board composition to see whether it has influence on
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4. Conclusion
nance
mechanisms.
This
quantitative
realize.
APPENDIX
Table 1: Matrix of Correlation between main independent variables
and dependent variables
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Notes:
1. OECD (The Organization for Economic Cooperation and Development) is inter-governmental body
with 30 member countries and another 70 committed to democracy and a free market economy.
2. Shleifer and Vishny (1997) are authors of one of the most comprehensive reviews of theoretical and
empirical research on similar topic, where they take account for different governance models across
countries. They adopt an agency perspective by focusing on the problem of separation between ownership and control to make an analysis on corporate governance efficiency
3. Moral hazard refers to the danger of agents not putting forth their best efforts or shirking from their
tasks
4. Adverse selection refers to the possibility of agents misinterpreting their ability to do the work agreed,
in other words, agents may adopt decisions inconsistent with contractual goals that embody their principals preferences (John Fontrodona, 2006)
5. ROE is measured in percentage (%) and equals to Net Income/Total Equity.
6. Non-executive ratio is measured by 1-(number in the board members exercise the management position/board size).
7. Political directors are those board members that have or have had a job position in politics or bank regulation and supervision (Ilduara Busta, 2008)
Journal of Economics and Development
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Acknowledgement:
We would like to extend our special thank to Ms. Nguyen Phuong Van, a graduate from Hanoi University
for her great support in completing this research.
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