2015-2016

Corporate Governance
practice in listed
companies in Bahrain
(Commercial Banks)

INTERNATIONAL FINANCIAL REPORTING STANDARDS (ACC 470) PROJECT

Shameem Ebrahim
Naveed Karim
Mohammad Zaman
Rafiullah Abdul Aziz
Submitted to
Submitted on

20126301
20124656
20111640
20112942

Sec 01
Sec 01
Sec 01
Sec 02

Dr. Abdel Mohsen Mohamed Desoky

02-Jun-16

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

Table of Contents
1.
2.
3.
4.
5.
6.

Abstract ....................................................................................................... 2
Introduction ................................................................................................. 3
Background .................................................................................................. 5
Literature Review ......................................................................................... 7
Methodology.............................................................................................. 13
Findings and discussion .............................................................................. 14
Conclusions and Summary .......................................................................... 21
References ................................................................................................. 23
Appendix .................................................................................................... 25

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

Topic: Corporate Governance practice in listed companies in Bahrain

(commercial banks)
Abstract:
The study examines the corporate governance practices in listed companies in
Bahrain, particularly the commercial banking sector. It also examines the
relationship between governance and banks performance. A sample of 7 listed
commercial banks were used. Only the year 2015 has been considered, as the
variables are more likely to be the same. IBM SPSS was used for descriptive and
correlation analysis. Our results concluded that there is a lack of financial expert
in audit committee which could help in improving banks performance. The
proportion of independent directors on board were less. A positive relationship
was found between board size and EPS. It was also found that presence of
independent directors influenced banks EPS and ROA while it didnt have much
impact on ROE. A negative relation between ACFE and performance was
concluded while meeting of audit committee improved banks performance. No
significant relations were found between variables of this study indicating
governance practices dont have much impact on banks performance.
Keywords: Corporate Governance, Audit Committee, Independent NonExecutive Director, Duality

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

1. Introduction
Corporate governance, in simple terms, is the system by which organisations are
directed and controlled. It identifies the duties and responsibilities among
various participants of an organization including board of directors,
shareholders, managers, creditors, suppliers, customers and other stakeholders.
Stakeholders refers to those who are affected by organisations decisions and
whose decisions can affect an organizations performance.
Agency principle refers to the relationship between principles and their agents,
who are appointed by the principles in order to carry out the work for them
(Jensen and Meckling, 1976). Today, in most of the organisations, there is a
separation between those who own the company and those who run the
company and look after its day to day operations. Due to the separation,
conflicts could occur between both the parties. Agents, i.e. the managers, could
act on their own interest and work to achieve their personal objectives instead
of working to attain organisations objective. As a result, scandals occur.
Corporate Governance practices has become an important topic of discussion
especially after the recent corporate scandals including the Volkswagen scandal,
Enron scandal, WorldCom, HIH, etc.
Prior to the Asian financial crisis that took place in 1997-1998, corporate
governance didnt play an important role in Malaysian economy. Lack of
independent directors, absence of audit committees and independent external
auditor were various bad corporate governance factors that were exposed
during the crisis. Dominance of major shareholders led to acting on their own
interest and also resulted in poor protection of minority group. This led to
corporate misbehaviour. This led to financial distress and a number of
organizations collapsed. This provided a basis for Malaysia to create Malaysian
Code of Corporate Governance (MCCG), that provides best possible framework
for governing companies in Malaysia.
Various mechanisms, both internal and external, have been suggested by
Corporate governance in order to reduce agency costs and conflicts. Internal
mechanisms include managers compensation, Board of Directors, major
shareholders control (Jensen, 1986). External mechanism consists of controlling
and managing markets for products, services and labours. An effective

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

governance ensures that resources of an organisation are used effectively and

efficiently. It also enhances investors confidence thereby attracting more
investments to the organisation.
A good corporate governance ensures that organisation has an adequate and
effective internal controls in place. It also ensures that information regarding
financial performance, condition, ownership and governance are provided on a
timely and accurate basis.
Various studies have concluded that good governance could lead to attracting
potential investors and also protecting and enhancing existing investors
confidence. (Bhat et al., 2006; and Jesover and Kirkpatrick, 2005).
Corporate governance in banks is considered to be slightly different from that
of non-financial institution. Stakeholders that include customers i.e. the
depositors and investors play a huge role in differentiation. The nature of banks
business makes it more leveraged in economy. Acceptance of deposits that are
not collateralized and lending those uncollateralized funds as credit to
borrowers makes it highly leveraged industry.
Banks are interconnected. For instance, if a company fails, the failure affects
only the companys stakeholders. When it comes to banks, a failure of one bank
could lead to the failure of other banks. This could spread rapidly in the economy
which could also result in consequences for the entire financial system.
The aim of our project is to determine the corporate governance practices in
commercial banks that are listed on Bahrain Bourse and to identify the factor
that affects the performance the most. The remainder of this paper is organized
as follow. Section 2 provides a brief background on corporate governance in
Bahrain and highlights the principles included in the code. Section 3 reviews the
literature related to corporate governance practices and firm performance.
Section 4 discusses the methodology that we have adopted for our research,
explaining the variables. Section 5 discusses the results. Conclusions were drawn
in section 6.

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

2. Background
Bahrain has been a central hub for investors in the Middle East due to its
geographical and time zone location connecting Asian and European markets.
Bahrain tries to attract investors to ensure sustainable economic growth in the
region and also to reduce unemployment to a great extent (Desoky and Mousa,
2013). Recent developments show Bahrain have been successful in attracting
international investors to invest in Bahrain. One such example is the
establishment of Dragon City at Diyar Al Muharraq. Due to this, there is an
increasing concern for Corporate Governance in Bahrain.
In Bahrain, the corporate governance code was established on 1st January, 2011
with an aim of establishing best practice codes in Bahrain and to enhance
investor confidence. The Ministry of Industry and Commerce along with Central
Bank of Bahrain (CBB) has worked over the past several years in order to
recognise various stakeholders and their interests. The code was made effective
on 1st January 2011 and the companies were required to comply by the end of
2011.
The Bahrain Corporate Governance code was based on 9 core principles of
corporate governance which adhere to international best practices. The code
further explains each principle in detail and provides recommendations that are
best suited for companies as per the Companys Commercial Law of Bahrain. The
principles are as follows:
The company shall be headed by an effective, collegial and informed
board. It emphasises on the need for board members to understand their
duties and responsibilities. It also explains the decision making process of
the board. There should be formal communication between the board
and the management so as to know to have knowledge about board
meeting discussions. There should be evaluation of board members and
board committees on a timely basis.
The directors and officers shall have full loyalty to the company. They
should be held accountable for organisations performance. In case of any
conflict of interest that arises, he/she shall try to avoid them and disclose
them to shareholders.

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

The board shall have rigorous controls for financial audits and reporting,
internal control and compliance with law. This focuses on audit
committee, which is one of the main committees of board of directors.
According to this principle, committee shall have at least three
independent, non-executive directors. It should also include at least one
member who is a financial expert.
The company shall have rigorous procedures for appointment, training
and evaluation of the board. Nominating committee is the main focus of
this principle which should include at least three members with majority
of independent directors. It also suggests that there should be a formal
induction for new directors.
The company shall remunerate directors and officers fairly and
responsibly. A remuneration committee must be established which
should have at least three members which has a majority of independent
members.
The board shall establish a clear and efficient management structure. A
management structure that includes CEO, CFO, secretary and internal
auditor must be established and duties should be allocated among the
members. Each member shall have their authorities defined well.
The company shall communicate with shareholders, encourage their
participation and respect their rights. There should be a regular meeting
between the owners/shareholders of the company and its board of
directors which helps in providing them with insights into the companys
strategies and also allow them to make recommendations.
Company shall disclose its corporate governance. There should be written
corporate governance guidelines which should be disclosed in the
companys website, if they have any. Compliance to the guidelines must
also be disclosed to the shareholders during their meeting.
Companies which refer themselves as Islamic must follow the principles
of Islamic Sharia. Apart from the normal guidelines, companies which are
Islamic have certain guidelines to ensure that they follow the Sharia laws.
The code was established to promote best governance practice in the kingdom
and to protect investors and other stakeholders of companies. Experiences from
other countries have proven that good governance practices are able to attract

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

more investment and increase companys value. However, this code isnt
considered as the minimum required standard. Companies can adapt standards
of higher quality and additional directives may be issued by the regulators such
as Central Bank of Bahrain (CBB).

3. Literature Review and Hypothesis Development

According to Yusoff and Alhaji (2012), the development of corporate governance
expresses how important it is to have good governance in an organisation, which
is evidenced by development of reforms and standards, not only at the national
level but also at an international level. The Asian financial crisis led to an
exposure of a number of poor corporate governance practices including absence
of independent directors, impartial audit committee and independent auditors.
Majority of the shareholders also participated in company management that led
to acting on their interest which resulted in corporate misbehaviour (Khoo,
2003).
It was in 2000, when the Malaysian government took an initiative to establish
the Malaysian Code of Corporate Governance (MCCG), which was used to
identify the best practices in governance. Its success was shown in a survey
which was conducted by PricewaterhouseCooper (PWC) and the Kuala Lumpur
stock exchange (KLSE) in 2002. In another study, it was shown that Malaysian
corporate governance score was much higher than that of several other
developed countries including Singapore, Hong Kong and Australia (McGee,
2008).
According to Adams and Mehran (2003), the governance of banks is different
from that of unregulated non- financial organisations for various reasons. Apart
from investors, the other stakeholders who have direct interest in banks
performance includes depositors and regulators. Since the health of overall
economy depends on banks performance, regulators are more concerned
about the effect governance has on their performance. Hence, the board of
directors play a vital role in governance (Fama, 1980; Jensen, 1993; and Hart,
1983)

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

In our research, we have used the following factors of Corporate Governance

(CG): Board Size (BDSIZE), Independent and Non-Executive Directors on Board
(INED), Duality (DUAL), Audit committee independence (ACINED), financial
expert in audit committee (ACFE), Size of audit committee (ACSIZE), number of
board meetings (BDNM) and audit committee meetings (ACNM).
3.1 Board Size (BDSIZE):
Board size refers to the number of directors on a companys board. Board
structure plays an important role in company governance. Size of the board vary
from country to country due to their cultural difference. Thus, there is no
optimal size for the board among the companies in the world. Studies by
Heidrick and Struggles (2007) concluded that companies operating in UK,
Switzerland and Holland have smaller board size while in countries like Belgium,
France, Spain and Germany have large board that consists of 13 to 19 members.
According to Lipton and Lorsch (1992), only eight to nine members should be
present on board whereas, Leblanc and Gillies (2003) suggested eight to eleven.
A board with thirteen members is considered ideal for small and medium sized
companies.
For large companies, an average of sixteen members is considered ideal (Epstein
et al., 2002; and Goshi et al., 2002). In contrast, Florackis and Ozkan (2004),
suggested that board is considered to be less effective which has more than
eight members on it. it was proved by Mak and Yuanto (2003) s study that, in
Malaysia and Singapore, companies which had only five directors had the
highest performance.
Studies have suggested that size of the board of directors directly affects
performance of the organisation. For instance, Chen et al. (2006) discovered
that theres a positive relationship between board size and earnings per share.
As the board size increases, its efficiency in monitoring and advising functions
also increases and as a result, the firm value increases (Andres and Vallelado,
2008). In contrast, studies by Beiner et al. (2004) and Van Ees et al. (2008)
revealed that there exists a negative relationship between firms board size and
its performance. Therefore, the relationship is inconclusive which could be due
to the presence of various other factors such as board structure and leadership.
(Colley et al., 2005).

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

H1: there is a relationship between size of the board and performance

3.2 Independent Non-Executive Directors (INED):
According to Mace (1972), Independent Non-Executive Directors are outside
directors or nonemployees. They are not responsible for day to day operations
of a company. Presence of outsiders on BOD can help to reduce the agency
problem to an extent by monitoring the behaviour of management. (Berle and
Means, 1932; and Williamson, 1985). It also helps to improve skills and expertise
of board members while enhancing independence (Abdullah, 2004). This has
been consistent with studies of Ramdani and Witteloostuijn (2009), and Rhodes
et al. (2010) and contrary to studies by Chen et al. (2006), Hannifa and Hudaib
(2006) and Conger and Lawler (2009).
Another study by Desoky and Mousa (2013), which was based on Bahrain,
concluded that presence of directors that are independent led to companies
disclosing more information related to investor relation on company website.
Even though there exist an advantage of having INED on board, studies have
concluded with mixed results of analysis of association of INED and performance
of companies. According to Choi et al. (2007), in Korea, presence of INEDs tend
to improve firms performance. Similar was the case with Abor and Adjasi
(2007), who conducted their study in Ghana, and Awan (2012). Jaggi et al.
(2009) concluded in his study based on frims in Hong Kong that earnings
management can be reduced as long as there is a presence of INED in the
companys board of directors.
On contrary, a negative relationship between INED and financial performance
was found by Zong-Jun and Xiao-Lan (2006). As per Abdulla (2006), his study, on
financially and non-financially distressed companies, concluded that NEIDs have
no impact on financially distressed companies. According to Conger and Lawler
(2009), this was due to the reason that NEIDs are not able to ratify the decisions
that are taken by the board members because NEID lack information about the
company.
In Saleh et al. (2005)s study, it was concluded that large presence of NEIDs was
responsible for betterment of auditing systems in Malaysia, which also improved
reporting timelines. Selection of NEID was not based on their experience and
knowledge in most of the countries. (Hannifa and Hudaib ,2006). This could
9

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

result in ineffective performance by them which indicates that company

performance is not completely based on their performance (Rahmans and Ali,
2006).
H2: there is a relationship between proportion of independent directors and
performance
3.3 CEO Duality (DUAL):
Another determinant of CG is Duality (DUAL) where both the Chief Executive
Officer (CEO) and the Board Chairperson is the same individual. Agency Theory
suggested that there should be a clear separation between the person who
chairs the board and the person who is responsible for companys operations
i.e. Chairperson and CEO respectively. According to Coskun and Sayilir (2012), if
both roles are managed by an individual, this could lead to maximising his
personal interest using his power at the cost of company shareholders.
According to Stewart (1991), decision making can be enhanced through
separation of CEO and chairperson. This promotes focus on companies goals
and objectives and also promotes rapid implementation of decisions for
operations. Separation also ensures that there is a proper checks and balances
over performance by the management, which also ensures that no one pursue
their personal strategies against the whole company (Argenti, 1976; Jensen,
1986; and Jensen and Meckling, 1976). Therefore, it is suggested to have
separate CEO and Chairperson for objectiveness and effectiveness.
Just like other CG factors relationship with performance, there exist a mixed
relation between duality and firms performance. A positive relationship has
been concluded in studies by Joshua (2007), Tin Yan and Shu Kam (2008) and
Hoje (2008). This is because no individual will be able to have their full control
over the company and focus on objectives of the organisation.
On the other hand, studies by Schmid and Zimmerman (2005), Elsayed (2007),
Rahman and Haniffa (2005), and Abdullah (2006) found that there was no
relationship between duality and corporate performance. There was no
difference in firm value between firms that had a combination and firms that
had CEO and Chairperson separated. The performance also varies from one
country to another country. In Gulzar and Wang (2011)s study related to

10

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

Corporate Governance and Earnings Management in China, they concluded that

due to the power and position that CEO enjoys, it gives him opportunities to
manage earnings thus resulting in a positive relationship between
differentiation of CEO and Chairperson and Earnings Management.
H3: There is a relationship between duality and performance
3.4 Audit Committee (AC):
Audit committee (AC) plays a vital role in corporate governance. The problems
that arise due to weak internal audit department led to board play a bigger role
in controlling them. An Audit committee shall consist of at least three
independent non-executive directors. As per Sarbanes Oxley Act of 2002, an
audit committee shall consist of all directors who are independent. It also
requires that at least one director to be a financial expert as it this would help
in improving its effectiveness in monitoring and reduce the chances of fraud
occurring, as per Blue Ribbon Panel (1998). They are responsible for appointing
the companys external auditors and also involved in determining their
remuneration. They are also held responsible for the activities carried out by
companys internal audit department and have to ensure auditors
independence during annual report preparation (Hussain, 2009)
Since 1990s, audit committees effectiveness in looking after the process of
financial reporting has been widely discussed topics of corporate governance.
Independence of audit committee can reduce earnings management (Klien et
al., 2002; and Bedard et al., 2004). It also has been concluded by Persons (2005)
that there is a positive relation between audit committee independence and
financial reporting process and thus reduces the chances of fraud occurring.
Studies by Ahmed-Zaluki and Wan-Hussain (2010) and Abed et al. (2012) showed
their significance in corporate governance. Companies that have all of their audit
committee members as INED (ACINED) exhibited a greater accuracy in
forecasting. Their majority presence also enhances firm performance (Zainal et
al., 2009).
Presence of a Financial Expert in audit committee (ACFE) helps to reduce
earnings management to a great extent (Abbott et al., 2004; and Bedard et al.,
2004). Apart from reducing earnings management, presence of an expert could

11

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

be a positive sign for the investors and improves their confidence in the stock
market due to their specialised skills which makes them a financial monitor
(Defond et al., 2005; and Agrawal and Chadda, 2005). As per Lin et al. (2006),
audit committee size (ACSIZE) helps in improving governance and is negatively
related to earnings management.
A study, which was based in Bahrain, by Ali (2014) found that audit committee
meetings were not regular and frequent and at times, and at times, no meeting
takes place during a whole year, thus reducing the effectiveness of audit
committee. Less number of audit committee meetings reduces the additional
cost of meeting and increases the company profits (Abdul and Haneem, 2006;
and Saleh et al, 2007).
H4: there exist a relationship between size of audit committee and performance
H5: there is a relationship between INED and performance
H6: there is an association between ACFE and performance
H7: there is a relationship between audit committee meeting and performance
3.5 Firm Performance:
For firm performance, our research deployed return on assets (ROA), return on
equity (ROE), Earnings per share (EPS) and firm size (SIZE). ROA and ROE are the
most commonly used measures of performance used by many researchers. ROA
indicates how well the assets of a firm have been utilized by the company in
order to generate profits, while ROE represents how well shareholders
investment have been utilized for profit generation (Epps and Cereola, 2008). A
recent study by Niresh and Velnampy (2014) concluded that theres no
significant relationship between firm size and performance. Amato and Burson
(2007) tested the impact of financial firms size on their performance and
concluded that theres a negative impact. A similar conclusion was also provided
by Shepherd (1972).

12

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

4. Methodology
The main objective of our study was to know how far the corporate governance
practices have an influence on banks performance. In order to analyse, the
following variables were used:
Corporate Governance Variables
Board size (BDSIZE)
Total number of directors on board.
Proportion of independent directors Ration of independent directors to
(BDINED)
total number of directors on board.
CEO duality (DUAL)
Indicator variables with the value of
0 if the role of chairman and CEO
combines and 1 otherwise.
INED in the Audit Committee
1 for companies that have all of the
(ACINED)
members in the audit committee
being INED, and 0 for otherwise
AC financial expertise (ACFE)
1 for companies that have a person
being a member of an accounting
associates or body, and 0 for
otherwise
Numbers of BOD meetings (BDNM)
Number of Board meetings per
annum
Numbers of AC meetings (ACNM)
Number of AC meetings per annum
Size of the AC (ACSIZE)
Number of members in the audit
committee
Firm Performance
Firm Size (SIZE)
Natural log of Total Assets
Earnings per share (EPS)
(Net income Dividends on
preferred stock)/ Average
outstanding shares
Return on equity (ROE)
Net Income / Shareholders fund
Return on Assets (ROA)
Net Income / Shareholder's Equity
Table 1 Variables and their measurements

Data regarding the above variables were collected only for the year 2015 from
annual reports as the data are found to be almost the same in other years as
well. IBM SPSS was used for descriptive analysis and Pearson correlation to
determine the relationship between each variable.

13

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

5. Findings and Discussion

5.1 Descriptive Statistics
N

Minimum

Maximum

Mean

Std. Deviation

BDSIZE

12

10.71

1.254

NED

.33

.82

.4776

.16511

DUAL

1.00

.000

ACINED

.14

.378

ACFE

.43

.535

BDNM

10

6.57

2.149

ACNM

4.57

1.512

ACSIZE

3.86

.690

SIZE

14.83255

23.27286

20.5710734

2.70609980

EPS

-.01000

.05300

.0249029

.02279541

ROA

-.05800

.01930

.0033286

.02738015

ROE

-.12970

.16000

.0791857

.10286803

Valid N (list wise)

7
Table 2 Results of Descriptive Statistics

The Table above (table 2) shows the descriptive statistics for all variables. It
indicates that across the seven commercial banks selected, the mean score i.e. the
average size of boards (BDSIZE) for the commercial banks are 10.71 with standard
deviation of 1.254. The maximum size of the boards is 12 members and the
minimum size of the boards is 9 members. This is somewhat consistent with what
the studies of Leblanc and Gillies (2003) suggested that eight to eleven members
should be present in the boards.
From the table it is also shown that the mean of independent to the total
number of the board members (NED) is 47.76% with a standard deviation of
16.511% indicating that a reasonable number of the members in Bahraini listed
companies are independent. This finding is in line with what has been reported
by Desoky and Mousa (2013), in their study which was based on Bahrain, they
14

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

concluded that presence of directors that are independent lead to companies

disclosing more information related to investor relation on company website.
It is also shown from the table that in all the firms, i.e. 7 commercial banks listed
in Bahrain bourse, the CEO and chairperson is different. This means that there
is separation of the role of CEO and the Chairman. This is in agreement with the
study of Stewart (1991), who said that separation of roles promote focus on the
companies goals and objectives and therefore promoting faster
implementation of decisions for operations. This is also in agreement with the
study of (Argenti, 1976; Jensen, 1986; and Jensen and Meckling, 1976) who
talked about strengthening checks and balances over performance by
management.
The table also shows that only one firm has all of its independent members in
the Audit committee (ACINED).
5.2 Correlation Analysis
CG variable
BDSIZE

EPS

ROA

ROE

R
Sig. (2 tailed)
N

.275
-.421
-.275
.550
.347
.550
7
7
7
Table 3 Correlation between Board Size and Firm Performance
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant.

Table 3 represents the relationship between board size and variables of firm
performance. According to our analysis, based on 7 commercial banks listed in
Bahrain, theres a negative relationship between board size and ROA and board
size and ROE. on the other hand, R= .275 for EPS, indicating that there is a
positive weak relationship between the board size and EPS. This means that
presences of larger board triggers a positive effect on the banks performance
thereby increasing their returns to shareholders. This relationship is consistent
with the study of Chen et al. (2006), and Andres and Vallelado (2008). The ROA
and ROEs negative relationship, which indicates the performance of banks, is
found to be in consistent with the studies of Beiner et al. (2004) and Van Ees et
al. (2008). As Colley et al. (2005), suggested, this could be because of other
factors such as board structure and leadership.
15

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

CG variable
INED

EPS
R
Sig. (2 tailed)
N

ROA

ROE

.106

.051

-.101

.821

.914

.829

7
7
7
Table 4 Correlation between board independence and firm performance

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant.

Table 4 analyses the relationship between independent non-executive directors

and firm performance. At a significant level of 0.05, presence of independent
nonexecutive directors is positively correlated to EPS (R= .106 p = .821 < 0.05)
and ROA (R= .051 p = .914 < 0.05) and negatively affects ROE (R= -.101 p = .829
< 0.05). However, they are not significant. this means that presence of
independent, nonexecutive directors doesnt have an impact on financial
performance of commercial banks in Bahrain which is similar to the conclusion
made by Abdulla (2006). As Conger and Lawler (2009) suggested, this could be
because they are not able to ratify the decisions made by other board member
as INEDs lack company information.

CG variable
DUAL

EPS ROA
R
Sig. (2 tailed)
N

ROE

.a

.a

.a

7
7
7
Table 5 Correlation between Duality and Firm Performance

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant.

Since no banks in Bahrain have appointed the same person as both the CEO and
chairperson of board of directors, the correlation couldnt be computed.
However, this is in line with the code of corporate governance in Bahrain. This
is supported by studies of Schmid and Zimmerman (2005), Elsayed (2007),
Rahman and Haniffa (2005), and Abdullah (2006), who found that there was no
relationship between duality and corporate performance.

16

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

CG variable
BDNM

EPS
R
Sig. (2 tailed)
N

ROA

ROE

.735

.387

.529

.060

.391

.222

Table 6 Correlation between number of board meetings and firm performance

**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant

Table 6 shows the relationship between number of board meetings at 7

commercial banks and its effect on banks performance. EPS, with R = .735, ROA
with R = .387 and ROE with R = .529 shows that they are positively related to
number of board meetings. EPS and ROE are said to have strong positive
relationship with BDNM. We can conclude that as the number of board meetings
increases, there could be an increasing positive effect on investors confidence
about the bank.
CG variable
SIZE

EPS
R
Sig. (2 tailed)
N

ROA

ROE

-.359

-.190

-.227

.429

.683

.624

7
7
7
Table 7 correlation between Firm Size and Firm Performance

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant

The impact banks size has on its performance is represented in table 7. It shows
that there is a negative correlation, at 0.05 significant level, between a banks
size and its ESP (R = -.359), ROA (R = -.190) and ROE (R = -.227). The insignificant
negative relationship is consistent with the studies of Amato and Burson (2007),
Shepherd (1972) and Whittington (1980).
CG variable
ACSIZE

EPS
R
Sig. (2 tailed)
N

ROA

ROE

.356

-.040

.104

.433

.932

.824

7
7
7
Table 8 Correlation between Audit Committee Size and Performance

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant

17

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

From table 8, a positive relation of EPS (R = .356) and ROE (R = .104) with size of
the audit committee (ACSIZE) shows that the higher the ACSIZE, it will have a
positive impact on shareholders and potential investors confidence (Defond et
al., 2005). Whereas, the negative correlation of ROA with ACSIZE (-.040) shows
it doesnt affect the organisations profits. However, all three relationships are
insignificant.
CG variable
ACINED

EPS
R
Sig. (2 tailed)
N

ROA

ROE

.099

.038

-.200

.833

.935

.667

7
7
7
Table 9 Correlation between Audit Committee Independence and Firm Performance

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant

The impact of have all INED as members of audit committee is shown in table 9.
EPS and ROA which have R = .099 and R = .038 indicates that there exists a very
weak positive relationship with ACINED. This relationship is similar to the
conclusion made by Kallamu and Saat (2013) that positive relationship between
the two exist. It can also be related to conclusion made by Zainal et al. (2009)
that presence of high INEDs helps to improve firm performance. However, a
negative and weak relationship is found between ACINED and ROE (R = -.200)
indicating their presence in audit committee wont produce any positive returns
for banks shareholders. This could be because, only one bank (Al Salaam Bank)
has all their members in audit committee as independent nonexecutive
directors. Even though other six banks have at least two INEDs, all their audit
committee members are not INEDS. This could help to reduce managers trying
to manage their earnings which is supported by the studies of Klien et al. (2002)
and Bedard et al. (2004). The majority presence could also mean that there is a
positive relation between ACNIEDs and reporting process as suggested by
Persons (2005).

18

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

CG variable
ACFE

EPS
R
Sig. (2 tailed)
N

ROA

ROE

-.064

-.417

-.180

.891

.352

.699

Table 10 Correlation between Financial Expert and Firm Performance

**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant

Bahrains Corporate governance code require that at least one of the members
of the committee to be a financial expert. This was not the case with banks with
only three out of seven commercial banks having a financial expert. Thus, the
above table (Table 10) indicates a negative relation with performance of banks.
The negative EPS (R = -.064) correlation suggests reduced investors confidence
due to absence of financial expert. Defond et al. (2005) s conclusion that it
improves investors confidence is hence proved. Lack of financial experts could
also result in reporting problems going undetected. (Agrawal and Chadda, 2005)
CG variable
ACNM

EPS
R
Sig. (2 tailed)
N

ROA

ROE

-.211

.141

.170

.650

.763

.716

Table 11 Correlation between audit committee meetings and firm performance

**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
a. Cannot be computed because at least one of the variables is constant

Table 11 represents the correlation results between number of audit committee

meetings and firm performance. The relationship between meetings and EPS is
negative (R = -.211) and insignificant. Whereas, a positive correlation exists
between meetings and ROA (R = .141) and ROE (R = .170) but not significant.
This shows that the less audit committee met, there has been a positive
movement in banks profitability. All the banks listed in Bahrain bourse have
their audit committees met at most 4 times except BISB which had 8 meetings.
Studies of Abdul and Haneem (2006) and Saleh et al. (2007) are consistent with
our results who suggested that less meeting will improve firms profits by
reducing additional cost of meeting.

19

BDNM

ACNM

ACSIZE

SIZE

EPS

ROA

ROE

10

11

12

ACINED

ACFE

DUAL

NED

BDSIZE

1
-0.354
-0.322
-0.167
0.091
0.107
0.099
0.038
-0.2

.a
.a
.a
.a
.a
.a
.a
.a
.a
.a

.a
.910**
-0.093
-0.388
-0.088
0.365
0.218
0.106
0.051
-0.101

0.101

0.711

0.256

-0.603

0.716

-0.205

0.275

-0.421

-0.275

ACINED

.a

DUAL

NED

0.188

BDSIZE

20

Table 12 Summary of Correlation Analysis

-0.18

-0.417

-0.064

-0.203

0.645

-0.354

0.041

ACFE

0.529

0.387

0.735

-0.672

-0.048

0.088

BDNM

0.17

0.141

-0.211

0.021

-0.548

ACNM

0.104

-0.04

0.356

0.254

ACSIZE

-0.227

-0.19

-0.359

SIZE

1
.946**
.765*

ROA

0.717

EPS

ROE

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

6. Conclusions
The study aims to provide an insight of corporate governances practices in
commercial banks in Bahrain. It also examines the relationship between various
corporate governance factors and banks performance. For our study, a sample
consisting of 7 commercial banks that are listed on Bahrain bourse, was used.
Data regarding the factors were found from annual reports of banks. Only one
year (2015) was considered because the variables are almost similar doesnt
change significantly in other years. IBM SPSS (trial version 22) was deployed to
carry out descriptive statistics and run correlation.
On the basis of our results of descriptive statistics, it was found that all banks
had different CEO and Chairperson, which is as required by countrys CG code.
Only 3 banks have a financial expert in their audit committee while majority and
not all the members were independent non-executive directors.
The correlation results show that at 0.05 significant level, there exist a positive
relationship between size of the board of directors and EPS. It was also found
that presence of independent directors influenced banks EPS and ROA while it
didnt have much impact on ROE. Since all banks included in our sample didnt
have same person as CEO and chairperson, correlation couldnt be computed
even though as per our literature review, theres no impact on performance
whether there is a separation or not. The bank size had a negative impact on
banks performance.
When audit committee variables were used, presence of more directors in the
committee enhanced investors confidence as there was a positive association
between size of audit committee and EPS and ROE. Independent nonexecutive
directors also play an important role in determining the firm performance.
Presence of INEDs reduces chances of earning management taking place.
Moreover, their presence could also improve reporting quality.
Since not all banks have a financial expert in their audit committee, there is a
negative relationship between ACFE and performance. This could result in
financial reporting problems. It also has been found that number of meetings of
audit committee is in accordance with the code and improves profitability by
reducing additional cost of having more meetings.

21

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

The results of our study somewhat provide an evidence for current literature.
However, none of the relationships were found to be significant which means,
the corporate governances factors have no much effect on financial
performance which is consistent with Yusoff and Alhajji (2012) s study based on
Malaysia.
From our understanding, we conclude that, even after four years of establishing
corporate governance code, even though most of the principles are complied
with, it is not strictly followed by banks for instance, appointment of financial
expert in audit committee. They also need to increase the proportion of
independent non-executive directors on board which will provide more
confidence to the stakeholders as well as boost the performance of banks.
The sample size is too small. For further research, it is recommended to use a
bigger sample size. Researches could be based on listed commercial banks in
GCC. We couldnt find any related literature regarding board More corporate
governance variables could also be employed for future studies such as external
auditor, nomination committee, etc. Regression analysis was not conducted.
Major focus for future studies should be on audit committee practices as they
were considered to be weak in a recent study by Ali (2014).

22

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

References

Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit Committee Characteristics and
Restatements. AUDITING: A Journal of Practice & Theory, 23(1), 69-87.
Adams, R. B., & Mehran, H. (2003). Is Corporate Governance Different for Bank Holding
Companies? FRBNY Economic Policy Review, 123-142.
Agrawal, A., & Chadha, S. (2005). Corporate Governance and Accounting Scandals.
Journal of Law and Economics, 48(2), 371-406.
AhmadZaluki, N. A., & WanHussin, W. N. (2010). Corporate governance and earnings
forecasts accuracy. Asian Review of Accounting, 18(1), 50-67.
Al-Ajmi, J. (2009). Audit firm, corporate governance, and audit quality: Evidence from
Bahrain. Advances in Accounting, 25(1), 64-74.
Ali, A. A. (2014). Corporate Governance: The Role and Effectiveness of the Audit
Committee in Bahrain. IJBM International Journal of Business and Management, 9(3),
131-137
Amato, L. H., & Burson, T. E. (2007). The Effects of firm size on profit rates in the
financial services. Journal of Economics and Economic Education Research, 8(1), 6781
Argenti, J. (1976). Corporation Collapse, the Causes and Symptoms. Long Range
Planning, 9(6), 116-117.
Bedard, J., Chtourou, S. M., & Courteau, L. (2004). The Effect of Audit Committee
Expertise, Independence, and Activity on Aggressive Earnings Management. AUDITING:
A Journal of Practice & Theory, 23(2), 13-35.
Bhat, G., Hope, O., & Kang, T. (2006). Does corporate governance transparency affect
the accuracy of analyst forecasts? Accounting & Finance, 46(5), 715-732.
Blue Ribbon Committee. (1999). Improving the effectiveness of corporate audit
Committee. AICPA, New York.
Cadbury Commission. (1992). Code of Best Practice: Report of the Committee on the
Financial Aspects of Corporate Governance.
COKUN, M., & SAYILIR, . (2012). Relationship Between Corporate Governance and
Financial Performance of Turkish Companies. International Journal of Business and
Social Science, 3(14), 59-64.
Desoky, A. M., & Mousa, G. A. (2013). The impact of firm characteristics and corporate
governance attributes on internet investor relations - evidence from Bahrain.
International Journal of Business and Emerging Markets IJBEM, 5(2), 119-156.
Elsayed, K. (2007). Does CEO duality really affect corporate performance? Corporate
Governance: An International Review, 15(6), 1203-1214.
Fama, E. F. (1980). Agency Problems and the Theory of the Firm. Journal of Political
Economy, 88(2), 288-307.
Ghayad, R. (2008). Corporate governance and the global performance of Islamic banks.
Humanomics, 24(3), 207-216.

23

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

Gulzar, M. A., & Zongjun, W. (2011). Corporate Governance Characteristics and

Earnings Management: Empirical Evidence from Chinese Listed Firms. International
Journal of Accounting and Financial Reporting, 1(1), 133-151.
Haniffa, R., & Hudaib, M. (2006). Corporate Governance Structure and Performance of
Malaysian Listed Companies. Journal of Business Finance & Accounting, 33(7-8), 10341062.
Hart, O. D. (1983). The Market Mechanism as an Incentive Scheme. The Bell Journal of
Economics, 14(2), 366-382.
Hussain, Saleh (2009). Corporate Governance: Quantity Versus Quality-Middle Eastern
Perspective, published by eBookIt. com store, Amazon.com.
Jaggi, B., Leung, S., & Gul, F. (2009). Family control, board independence and earnings
management: Evidence based on Hong Kong firms. Journal of Accounting and Public
Policy, 28(4), 281-300.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behaviour,
agency costs, and ownership structure. Journal of Financial Economics, 11, 305360
Jensen, M.C. (1986). The Agency Costs of Free Cash Flow. American Economic ReviewPapers and Proceedings. 76, 32629
Jesover, F., & Kirkpatrick, G. (2005). The Revised OECD Principles of Corporate
Governance and their Relevance to Non-OECD Countries. Corporate Governance,
13(2), 127-136.
Kallamu, B. S., & Saat, N. A. (2015). Audit committee attributes and firm performance:
Evidence from Malaysian finance companies. Asian Review of Accounting, 23(3), 206231.
Klein, A. (2002). Audit committee, board of director characteristics, and earnings
management. Journal of Accounting and Economics. 33, 375-400
Lin, J.W., Li, J.F. and Yang, J.S. (2006). The effect of audit committee performance on
earnings quality. Managerial Auditing Journal. 21(9), 921-33
Niresh, J. A., & Velnampy, T. (2014). Firm Size and Profitability: A Study of Listed
Manufacturing Firms ed Manufacturing Firms in Sri Lanka. IJBM International Journal
of Business and Management, 9(4).
Raghunandan, K., Read, W. J., & Rama, D. V. (2001). Audit committee composition, Gray
directors, and interaction with internal auditing. Accounting Horizons, 15, 105118
Ramadhan, S. (2014). Board Composition, Audit Committees, Ownership Structure and
Voluntary Disclosure: Evidence from Bahrain. Research Journal of Finance and
Accounting, 5(7), 124-138
Saleh, N. M., Iskander, T. M. and Rahmat, M. M. (2007). Audit committee characteristics
and earning management: evidence from Malaysia. Asian Review of Accounting, 15(2),
147-163
Shepherd, W.G. (1972), The Elements of Market Structure. The Review of Economics
and Statistics. 54 (1), 25-37

24

Corporate Governance practice in listed companies in Bahrain (Commercial Banks)

Switzer, L. N., & Tang, M. (2009). The Impact of Corporate Governance on the
Performance of U.S. Small-Cap Firms. INTERNATIONAL JOURNAL OF BUSINESS, 14(4),
341-355.
Vaz, P., & Brando, E. FACTORS THAT INFLUENCE THE CORPORATE GOVERNANCE: THE
PORTUGUESE REALITY. 1-18.
Yusoff, W. F., & Alhaji, I. A. (2012). CORPORATE GOVERNANCE AND FIRM
PERFORMANCE OF LISTED COMPANIES IN MALAYSIA. Trends and Development in
Management Studies, 1(1), 43-65.
Zabri, S. M., Ahmad, K., & Wah, K. K. (2016). Corporate Governance Practices and Firm
Performance: Evidence from Top 100 Public Listed Companies in Malaysia. Procedia
Economics and Finance, 35, 287-296.
Zainal, A. Z. Mustaffa, K. N. and Jusoff, k. (2009). Board structure and corporate
performance in Malaysia. International Journal of Economics and Finance, 1(1), 150164.

Appendix
Commercial Banks listed in Bahrain Bourse
S.NO
1
2
3
4
5
6
7

NAME OF THE BANK

Al Salam Bank - Bahrain B.S.C.
Al-Ahli United Bank
Bahrain Islamic Bank
BBK
Ithmaar Bank B.S.C.
Khaleeji Commercial Bank B.S.C
National Bank of Bahrain

25