CHAPTER-1

INTRODUCTION
Corporate governance represents the system of a firm through which the firm is
directed and controlled. The recent financial breakdown and crisis has found a lot of
predictions in corporate governance checkouts, and the regulators, worldwide, have
been making certain necessary amendments and procedures in their respective codes
and guidelines in order to overcome the corporate governance issues of the different
firms. The board of directors are very vital for corporate governance checkout. This
board is responsible to ensure that firm has a good checkout of shareholder rights, solid
control environment, a good disclosure, transparency and exert for the high interest of
the firm. The board plays a key role in directing and controlling and is accountable for
the business operation and firm success.

Adrian Cadbury (2000) Defines the corporate governance may also be meant
as a structure of firms following which the company management work for the best
interest of the firm and try to keep the investors and all stakeholders interest first and
also to look at the society as well. And to make the managers accountable for the affairs
of the firms.

Thus both these internal and external structures make the institutional structure of the
country (Sarkar, 2012). The corporate governance has the main objective of securing
and protecting the interest of investors, shareholders and stakeholders. And make the
firm accountable to communicate to all stakeholders in honest way. The corporate
governance really help in enhancing the confidence of the investors and building the
trust of the stakeholders. Risk but help in lowering the cost of capital (Alishah et al,
2009).

According to Deegan (2004), lack of pattern in information regarding the

relationship between agent and principal has resulted in uncertainty. The agents or
managers of a firm have limited information and knowledge that may be necessary in
the larger interest of investors for enhancing their wealth. Such knowledge of agents
may be useful for the managers only as it is specific to a firm or corporation. Therefore
Jensen and Meckling (1976) defined the expanses by the managers to assure the
principal that their actions shall not harm and any loss that due to the decisions of agents
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that could have maximized the shareholders wealth. The agency problem may also be
relative to the characteristics of ownership in different parts of the world. Where the
structure of ownership is dispersed, the investors may reduce price of the shares in case
they are not happy with performance of the management. And where the ownership is
concentrated, the outsized and bulky shareholders / investors control the agents so as to
achieve maximization of their wealth (Spanos 2005).

Employees always looking for attractive firms, businesses looking for profitable
avenues, societies looking for an excellent citizenship and government looks for its
taxes. So there is need of such checkout to uphold and address the interest of different
stakeholders. A checkout needs to be promulgated to serve, protect and safeguard the
interest of all stakeholders, and there need not be a clash among the stakeholders.
Corporate governance represents the procedures and rules of firm which help in
attaining the stake of stakeholders and the interest of the corporation (Butt, 2012).
Though, there is limited empirical proof of comparative study in conventional and
Islamic banks with its financial performance exist. This study addresses that gap by
comparing the conventional banks with Islamic banks.

1.3 Problem Statement

Corporate governance is mainly the administrative body of the firm. The scientist
attempts to explore the effect of corporate governance on firms funding.The privilege
and interesting corporate governance rehearses is genuine test for the both ordinary and
Islamic banks, so this exploration attempt to examine the distinction that Islamic and
customary banks have.

1.4 Research Questions

1. How the governance works and effect of it on banking of both kind?

2. The difference between islamic and other banks ?

1.5 Research Objective

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1. We want to find how administrative qualities affect the work flow of both type
of banks Islamic and other.

2. To check the working between 2011 to 2015 of the banks.

3. Find how the governance affect the budget system.

4. To fine the core quality of these banks and how they use them to provide successful
business ratio.

1.6 Significance of the study

The corporate governance play a vital role in the success of an organization.

This research would definitely contribute to the repository that will enable the banks
managers to practice different corporate governance like to maximize the stock of the
stock holder.

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 Chapter-2

LITERATURE REVIEW

2.1 Corporate Governance

To look and watch the affairs of a firm and the management decisions, the
shareholders and investors practice a frame work of rules known as corporate
governance. The Companies of Economic Cooperation and Development defined CG
as “a structure through which business companies are directed and controlled”. OECD
also gave explanation regarding what these companies structure and system are and
how do these benefit corporations with specific reference to good corporate
governance. They explained and elaborated that the rights, Duties and responsibilities
of all stockholders including investors, shareholders and BOD as well are distributed
through the corporate governance and that there is certain checkout for the decision
making of corporate matters (OECD, 1999).” Under the model of agency theory, there
is complete access of information to the individuals as well as the shareholders / owners
also have the knowledge of the fact whether the corporate governance practices and
activities are in relevance with the goals they intend to pursue or achieve and that the
board of directors also has knowledge of the goals of their companies (Smallman 2004).
A well organized and resourceful market may lessen the problems arising of agency
theory as observed by the agency theory proponents (Clarke 2004).

The analysis and discussion of different theorist focused on such corporate

governance practices which can minimize the agency problem and that the actions of
managers or agents so that to check wether the practices are aligned with the goals of
companies or corporation in the best interest of its shareholders, investors and
stakeholders. Most important of such practices were observed to be the corporate
governance structure of a corporation (Davis, Schoorman & Donaldson 1997).
Nimalthasan (2013) asserted that all these variables have a clear link with the firm
performance. Owen (2003) argued that to have competition on local and international
basis all investors, firms and governments have recognized the importance and
significance of the corporate governance. These days corporate governance is
considered the main area of business and interest of the investors.

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 Corporate governance has shown that poor corporate governance and weak
monitoring causes risk and effect the financial performance badly (Brick &
Chidambaram, 2008). If a corporation makes good financial decision it will improve its
performance and will help in cost minimizing. The firm usually achieve its objectives
by maximizing its revenues and minimization its cost and such situations can be made
by the proper corporate governance of the firm .This helps in improved profitability
and cause an uplift in the share prices and overall value of the firm. (Van Horne &
Harlow, 2009). It is very necessary to find the impact of corporate governance on the
financial performance of both conventional and Islamic banks in Pakistan. That is why
the study has been conducted to know the difference in the elements of the corporate
governance of both type of banks and its outcome there. Corporate governance provides
direction and control and protects the stakeholder’s interest and trust (Butt, 2012).
Velnampy (2013) argued that corporate governance boosts the performance of
accountability, growth and transparency in the system of the firm which then improves
the performance of the firm.

2.2 Financial performance of Firm or corporate governance

Mickee) asserted that corporate governance tells about the application regarding
the frame work of objectives, decisions and behavior of the management in
organization. Maher and Andersson (1999) argued that every firm wants to maximize
shareholder value and build the interest and trust of investors and stakeholders, and
such situation can be found through the transparency of CG practices in firm. According
to Drobetz, Shillhofer and Zimmermann, (2003) asserted that best CG practices help in
improving the firm performance. So they revealed that smooth running is very vital for
the shareholder value..Chugh, Meador and Kumar, (2009)found that corporate
governance really guarantee the true performance of a firm. Bocean, (2001) argued that
CG safeguards the rights of the stockholders, stockholders and investors.

The Corporate governance is a field of study having diversified limitation and

conversantly used in many ways. Some researchers thought it as a separate field from
ownership, but defing the concept of CG, it looks very simple while defining this
concept. Eleborating this concept it can be concluded that this term corporate
governance helps all managers and stockholders in finding ways of its governance and

5
control. Simply corporate governance helps the internal stockholders and external
stackholders in better governing the corporation and to achieve the desired objectives
within the specified span.

Mutual relationship between individuals and groups through various

contracts/agreements is called firm. These agreements are made for different purposes
i.e finance, structure, ownership etc. Since the emergence of firm & corporate concepts,
different conflicts have been raised in these relations the ownership structure is the most
thing in a firm. Firm concept gained famousness from perception of earning profits.
The perception that businesses are developed to earns the people become found to
invest in business to increase their wealth while on the other hand firms, attracted these
people to invest with aim to expand their business. Before to invest every individual
have to make sure that either the firms is earning profit or going in loss following are
main types of ownership structure.

Sole proprietorship is a single ownership type of business and are not registered
properly under state laws in this type of business is liable for all the lusts having
unlimited liability and take the whole profit as will. Partnership is that type of business
in which two or more individuals on equal share of risk loss and profit develops a
business in another type of partnership there is limited liability in which the partners
limits the losses to initial investment In the wealth of nations in 1776, he stated that the
manager having less authority indecision marking that why they don’t care as
shareholder do Agency theory says that if the ownership and management are separated
management will work for their own interest and management will go there for their
own in test.

A corporation is single entity, having limited liabilities and is separate from

owner and Management Corporation pays its own taxes and deals according to the law
under which it operates. Non profit corporation’s public limited corporations and
private limited corporations are the common types of corporation. Relationship
between ownership structure and firm performance is of most important to find Cole
and Mehran fine close relation while mark at (1988) Kole (1995short and kassy
(199,Mclonned and Servaes (1990) show non linear relation in the corporate
governance field Adem Smith is the first one to sort his work and pen pointed the value
of the board. In order to maximize the wealth of shareholders, the owners recruit

6
managers to take advantage liy themselves. In form of agency problem, managers lignin
to work for their own advantage so, it creates a tussle lie twee them, these type of roles
may lead to lost the firm this as called agency lost. Jensen & Meckling, (1976) Fame
(1980) Slilefer & Vishny, (1997) recommended that the principal must start a check
and balance system in order to decrease agency lost, which he can assess the
performance of manger a lot of studies are held in order to ascertain the performance
of lord in the firms majority of them come consensus that the performance board is
much necessary and dispensable for the Barnchart, Marry & Rosensteeni 1994, Shleifar
& Visgriy 1997, said that board corporals in building setup of on management.

Williamson, 1996 Hillman etal, 2000recommended that the board plays a role
as a liason between the firms and its environment. Famed & Jensen, 1983 Davies 1999,
kempp, 2006said that board plays an active role in the performance of firm’s strategic
decision making. Corporate governance of any company has specified roles for each
class, i.e owners, stockholders, stackholders and board of directors.This CG
machanisom draw lines for each class and every one has to conduct accordingly.A well
organised corporate structure helps in forming a plateform, which helps the firm in
innovation, development and farther value creation in the industry where it function.

This emergence put the researchers in lien to better deal with the managers and
corporate owners to get the desired results. The corporate owners generally deals with
the ownership structure of the firm and keeping attachment with key affairs regarding
this.. The owner give responsibilities to the management who on their behalf works an
agent for the best interest of the shareholders. These managers being appointed than
farther appoint the board of directors of the company.Berle and Means (1932) found
that the true owners in todays era is separated from the campany affairs.Simply the
owners try to avoide the interference in the affairs of the corporation. However it is
evidenced that such kind of practices do create the agency problem as well, which
impacts the financial performance of the firm negatively. Javed and Iqbal, (2006)
argued from their research in which they analyzed non-financial firms having great
market capitalization and found that in Pakistan the CG practices are very vital for the
firm performance. They found that tight control helps improving the firm performance.

2.3 Board Diversity and Financial performance

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 Baranchuk, N., &Dybvig, P. H. (2009) used penal data of fabrics industry and
conducted a study on “consensus in diverse corporate board” they found significant
impact on financial performance of fabrics industry they asserted that combination of
both male and female nominees is very important for sustained growth and first-rate
financial performance of firms, they further proclaimed that board diversity is the most
prominent element of corporate governance for accelerating growth, the researchers
notice that overall corporate governance practices is very crucial for improving
financial performance and protecting shareholder property and interest as well.

According to Cadbury committee (1992) report corporate governance plays a

fundamental role in improving transparency, disclosure, materiality, management and
individual fraud detection and improving performance of corporations, they reports
reveals that for better conduct of business there must be an appropriate board size with
combination of executive, non executive independent and dependent directors, there
must be an optimal level of board diversity, the board should not be fully diverse nor
diverse too little, there must be a clear policy and strategy regarding CEO duality as it
can impact the firm in both positive and negative manner. In a nutshell for good
performance of firm and detections of fraud and eliminating agency problem there
should be strong corporate governance practice in organizations.

Claessens, S., &Djankov, S. (1999) argued on corporate governance, ownership

concentration and board diversity in Czech Republic context they used penal data and
multiple regression model, their statistical analysis reveal significant relation in CG and
performance additionally a strong significant relation and effect of ownership
concentration and board diversity, the researchers asserted that board diversity cause
major deviation in firm financial performance there for it is recommended strongly to
all kind of business organization to diverse their board as much as possible for better
returns and better stock values. Coles et al, (2008) inquired the size of board of directors
and conducted a study “Board: does one size fit all” the scholar observed 45 deferent
firms using correlation and regression model and came up with a result that board size
depend on the firm size as the firm grow more and more there must be extension in
board size and it there is any retrenchment the board must be narrowed, they further
asserted that it is not only the board size that impact the financial performance of firm
but the board diversity as well, even the board size is good fitted to the organization but

8
the board is not adequately diverse the better board size will not be fruitful, hence there
must be a proper board size along with adequate diversity.

Connelly, J. T., & Limpaphayom, P. (2004) scrutinize the effect of corporate

governance and board characteristics on performance in life insurance industry of
Thailand. The scholars used the penal data of Thailand listed life insurance companies
and proclaimed that corporate governance practice have positive impact on life
insurance companies of Thailand, further the board size, executive, non executive,
independent directors, and board diversity also have significant impact on firms
performance, the board size, executive, non executive, and independent directors are
positively correlated while the board diversity has negative impact on financial
performance of Thailand life insurance companies, they further proclaimed that for
good conduct of insurance companies there must be executive, non executive and
independent directors but the board should not be diverse as board diversity in insurance
companies have negative impact on profitability.

Dalton, et al, (1998) researched the relationship among board composition,

CEO duality, board diversity, leadership strategy and financial performance of firm, the
scholar did not found any relation among board composition, CEO duality, board
diversity and financial performance of these firms. The Dalton further asserted that
board composition and board diversity do not have any impact on profitability of firm,
how the board is composed and how much is it diverse do not matter at all. Erkens, et,
al. (2012) investigated the corporate governance practices in 2007-2008 financial
crises, the studied financial institutions worldwide, the researchers asserted that it was
only the absence of corporate governance practices that the world face 2007-08 crises,
there were no adequate governance practices in businesses the Enron corporation is at
top of the list who’s CEO, board of Directors, Accounting department, their audit
committee and Enron audit partner whole perpetrated a fraud, if there were adequate
corporate governance practices imposed by law before 2007, the world would not have
faced such crises, in a nutshell the researchers found a positive and very significant
relation and impact of corporate governance on the firm financial performance. Evans,
D. S. (1987) studied the relationship among firm size, growth, age, board characteristics
and firm financial performance using penal data of manufacturing industry, Evans
found the positive correlation among firm size, growth, age, and board size while no

9
relationship among board diversity, board composition, CEO duality and firm financial
performance, the scholar asserted that firm size, growth, age, and board size have
positive and significant impact on profitability of firm and should be pay proper
attention while board composition and board diversity have no impact on profitability
of manufacturing industry,

Fama, E. F., & Jensen, M. C. (1983) conducted a study on agency problem, the
Fama reported that agency problem is the major reason of almost 92% failure and
bankruptcy of companies, to overcome the agency problem the corporate governance
is the only tools of curing this agency problem, but improve the conduct of business
and financial performance there must be an adequate board of directors with suitable
numbers of executive, non executive, independent, dependent, male and female
members of the board, the Fama further proclaimed that corporate governance is the
only tool of improving employees morals, protecting shareholders interest, and
achieving business goals and objectives.

Gales, L. M., & Kesner, I. F. (1994) conducted a study on board composition

and board size in bankrupt organization, they found that board size and board
composition and board diversity were not correlated to bankruptcy of these corporation
and there is no impact of board size and composition on profitability nor bankruptcy.
Gill, A., & Mathur, N. (2011) conducted a research in Canadian context, the studied the
manufacturing listed firm of Canadian stock exchange, the researchers focused on
board composition CEO duality and firm profitability, scholars found a strong and
significant relationship among board composition and CEO duality, the Gill et al
asserted that board composition plays a vital role in financial performance of company
as there are deferent members of board with deferent experience, deferent expertise,
deferent behavior i.e. optimistic and pessimistic, deferent educational background and
deferent cognitive abilities, therefore as the board becomes more and more divers it
positive impact the overall policies, planning, strategies and overall course of conduct
directly and firm financial performance indirectly.

2.4 CEO Duality and Financial Performance

From the perspective of stewardship theory, as oppose to agency theory the two
position i.e. CEO and chairman should be concentrated and given to one person. The
10
stewardship theory assume that CEO duality is very essential for good performance as
the concentrated leadership structure will make easy the effective management with the
principal of unity of command. since the responsibilities and decision making
authorities are given to one person, it facilitate the person to understand the firm
operation, make good decisions and understand accountability, all these factors
contribute to good financial performance of firm and minimizing the agency problem,
therefore according to stewardship theory the CEO and chairman should be the same
person and should not be split out. Fama and Jensen, (1983) in there study of corporate
governance impact on stock values concluded that chairman plays a vital role in the
company, chairman is responsible for the hiring, firing of employees, arranging board
meeting, making detail for board meeting and insuring that all the matter relate to
business are included in meeting agenda, running board meetings, monitoring board
duties and responsibilities and most important replacing the CEO if the chairman
believe that CEO is not capable for CEO duties are find him negligent, the CEO is
responsible for management of the firm and implementation of firm policies and
strategies, the scholars further asserted that if the two positions are concentrate the
chairman cannot dictate the CEO as this is himself, who is overriding the authorities
and there is no one to monitor and control him which lead to agency problem and verse
the performance of firm.

Abiding et al (2009) conducted a study on board structure and corporate

financial performance in Malaysian context they studies 150 Malaysia list with and
analyze the penal data of these firm, their results reveals a strong and significance
impact of corporate governance on firm performance. they argued that board structure
as an element of corporate governance has positive and significant impact on firm
performance, while CEO duality doesn’t appear to have any impact either positive nor
negative, they concluded that for good performance of firm there must proper corporate
governance practices and there should be executive non-executive and independent
directors in board while CEO and chairman if split or concentrated in one individual
will not impact the firm performance.

Black, et al, (2006) carried out a research on ” Does corporate governance affect
firm’s market value” they studied Korean stock exchange listed companies of
automobile with their penal data using multiple regression model, the scholars asserted

11
that corporate governance in automobile company plays an important role in enhancing
the market value of firms as corporate governance minimize the agency problem in
firms, wastage of firm resources, increase accountability, transparency, which
ultimately align the interest of shareholders and that of managers contributing to good
accounting performance increasing share value in financial markets and thus market
value of firm. They further argued that CEO duality is another factor that must paid
proper attention as there are managers who prefer to split the CEO and chairman and
point two persons as CEO and chairman, which can create a problem of conflict in
making strategic decisions and there will not be a unity of command as well
miscommunication and delay of all activities and operations, while CEO duality will
overcome all these problems and accelerate the business activities, decision making and
expedite overall business. Thus the authors recommended that for best performance of
corporations there must be adequate practices of corporate governance and the CEO
duality as has positive and significant impact on performance thus should not be split
out.

Chhaochharia et al, (2007) asserted that corporate governance has a strong and
significant impact on firm value; the more effective the corporate governance practices
there will be more profitability and increase firm value. The scholars proclaimed further
that board size has strong positive impact, audit committee has positive impact board
composition have no impact while there is a strong and significant impact of CEO
duality on firm value and accounting ratios.

Core, J et al, (2006) conducted a study on corporate governance impact on stock

returns, they studied 156 listed company’s penal data using multiple regression model,
the author used payout ratio, earning per share dividend per share and firm distribution
ratio for calculating stock returns. The author asserted that corporate governance
practices are most important factors that are responsible for firm good or verse financial
performance as corporate governance has significant positive impact on firm financial
performance that ultimately contribute to good stock return and market value of firm.
They further asserted that to minimize the agency problem in firm there should be
adequate board size not very big nor too small, the board should be properly diverse to
utilize deferent expertise, skill and knowledge of diverse members of board of directors.
There must be an audit committee to assure the transparency and disclosure of business

12
position to shareholders, creditors, debtors and all stakeholders. The CEO and chairman
must be the same individual to accelerate the business process and minimize the agency
problem and conflict of interest, they further recommended that CEO duality is
inversely correlated to firm financial performance and accounting ratios it because
when two positions are concentrated in one individual there exist agency problem as
the senior and junior are the same person therefore there is no monitoring and control,
no supervision and direction persuasion of persona; interest, ignoring shareholder
interest, agency problem takes place firm resources are misused and appropriated, all
these factors contribute to verse financial performance of firm and hence reduce stock
returns and market value of corporation.

Drobetz, W. et al, (2004) conducted a research in German context. They studied

the listed firm of berlin stock exchange to investigate the impact of corporate
governance on expected returns. They argued that corporate governance plays a vital
role in increasing the expected and actual stock return as well. The author asserted that
corporate governance is positively correlated to firm performance and stock returns, the
scholars further proclaimed that all elements of board i.e. board size, board
composition, board diversity and board independence are highly correlated to firm
performance and therefore should be manage with due care and profession as these
elements can boost the firm and on the other hand if mismanaged can lead to liquidation
and bankruptcy. Their findings revealed that CEO duality has significant positive
impact on corporate financial performance due to sharp communication, unity of
command and low conflicts in strategic decision making contributing to fast business
process and thus boost stock returns of German listed firms.

Ertugrul, M., and S. Hegde, (2009) asserted that corporate governance has many
components and tools for best conduct of business which has deferent impact of stock
value and financial performance of firm. They argued that CEO duality has strong
negative impact on financial performance and market value of firm due to creation of
agency problem that took place after concentrating the CEO and chairman in one
individual, therefore it is recommended that both the titles should be split out and
assigned to deferent individuals for good conduct of business and boosting market value
of firm and stock value as well.

13
 Carter (2003) found that corporate governance plays an essential role in the
good conduct of business, from the perspective of all stakeholders i.e. debtors, creditors,
banks, shareholders, management, employees and board of directors specially as board
of directors are wholly solely responsible for results and are accountable to all
stakeholder and court of law in case of any fraud and bankruptcy. Their empirical
analysis revealed that board diversity has a strong and positive impact on firm
performance and as the board diverse more the profitability of firm will improve
directly and stock vale indirectly, they further notice that increasing the number of
female members on board and splitting out the CEO and chairman can additionally
accelerate the financial performance of companies. Dalton, et al, (1998) researched the
relationship among board composition, CEO duality, board diversity, leadership
strategy and financial performance of firm, the scholar did not found any relation
among board composition, CEO duality, board diversity and financial performance of
these firms. The Dalton further asserted that board composition and board diversity do
not have any impact on profitability of firm, how the board is composed and how much
is it diverse do not matter at all.

Evans, D. S. (1987) studied the relationship among firm size, growth, age, board
characteristics and firm financial performance using penal data of manufacturing
industry, Evans found the positive correlation among firm size, growth, age, and board
size while no relationship among board diversity, board composition, CEO duality and
firm financial performance, the scholar asserted that firm size, growth, age, and board
size have positive and significant impact on profitability of firm and should be pay
proper attention while board composition and board diversity have no impact on
profitability of manufacturing industry,

In a nutshell there are deferent scholars who have deferent idea regarding CEO
duality impact, some asserted positive while other proclaimed negative impact;
therefore it is necessary to investigate the impact of CEO duality on firm performance
in Pakistan context.

2.5 Board independence and Financial Performance

Board independence is another factor that impact the corporate governance

quality directly and firm performance indirectly, it is a conventional wisdom that board
14
independence improve the quality of corporate governance but Xiao and Yu (2007)
studied that corporate governance relationship with firm performance in chines context,
they studied 225 listed companies of chines stock exchange, found a strong and
significant effect performance, but they did not found any impact of board
independence on quality of corporate governance. Feng (2008) on the other hand
proclaimed that corporate governance has a strong impact on firm performance but
board independence does not have any impact on corporate governance quality in china
context as it did not improve the performance additionally. Yuan (2009) conducted a
research on the chines stock exchange listed companies and asserted that board
independence does not affect firm performance due to six reasons:

Firstly the independent directors in board are controlled by management team

of the company, Jiang (2009a), Liu (2009), Jiang (2009b), Zhang (2009a), Qu (2009),
Yuan (2009), Gu (2009), Zhou (2009) found that ownership ship structure in chines
context may provide the opportunity to hold majority of shares due which the which
makes the holder of majority shares to appoint the directors, who is persuaded by his
own interest and hence appoint the directors according to his willing which is a direct
nepotism which increase agency problem and thus effect the business as whole.
Secondly the in china there is a lack of people who satisfy the criteria for independent
directors and they do not have sufficient skill and knowledge of management audit and
monitoring management team Wang, 2006; Feng, 2008. Thirdly the system flaw of
corporate governance duplication of roles of board of independent directors and
supervisors cause both the boards to become rivals of each other and thus impact the
overall code of conduct of business and hence performance. Fourthly, the chines stock
markets lack the complete legal governance of independent directors system (Qu, 2009;
Jiang, 2009). Legal rules do not define explicitly the duties of independent directors, in
current law there is no responsibilities of independent directors thus in a nutshell the
appointment of independent directors do not improve the quality of corporate
governance in chines context. Fifthly, the independent directors in chines context may
lack monitory reward as independent directors must be paid. The salary may be fixed
by corporate executives, thus the corporate executives have a logical control over the
independent directors, and independent directors cannot work without good salary and
influence of executives. Sixthly, low independence of board will affect the effectiveness
of board as well. The CCL requirements regarding the independent directors are one

15
third of board members, in china all the listed companies satisfy these criteria but they
do not increase the number of independent directors above this limit.

After a series of corporate scandals in deferent parts of the world and specially
in United States of America the focus on independent directors in board have grab
attentions, for the transparent conduct of business and minimization of fraud it is most
important the majority of board members should be the independent directors (Vafeas,
1999; Vafeas, 2003; Vafeas, 2000). If director is an independent director, he cannot
participate in management of firm nor he can hold shares of the company thus
independent director cannot be part of management team and must be liberated of
shareholders. (Clarke, 2007) asserted that independent directors are most prominent
way of increasing corporate governance quality in companies, there are deferent
shareholders in company small number of shares holder and large number of shares
holders, as they major shareholders have more voting rights they may influence the
board to run the business according to their strategies and plan while exploiting small
shareholders, the existence of independent directors in board can play a vital role in this
circumstances to protect the interest of all shareholder not of few large shareholders.

Balasubramanian et, al (2010) conducted a study in Indian context on corporate

level governance and market value of firm, they studied board characteristics i.e. board
size, board diversity, board composition, board independence, and board composition,
they used primary data of Bombay listed companies on 5 point likert scale and analyzed
through correlation matrix and multiple regression model. They asserted that overall
corporate governance has positive impact on firm code of conduct, policies, strategies,
operations, profitability, dividend share prices and thus on market value of firm. They
asserted that there are numerous factors of corporate governance that contribute to good
governance among that board size, board independence, board diversity are the most
prominent and influential factors that have strong and positive impact of market value
of firm while the board composition do not impact the market value of firm nor the
quality of corporate governance. They further recommended that for better financial
performance and good market value it is crucial to have large board size with more than
tem members but less than thirteen to have effectiveness as in more large board there
is always a conflicts in decision making and thus impact efficiency, the board must be
adequately diverse so that deferent skill, knowledge and expertise of deferent members

16
can be utilized. There must be a large number of outside directors in board to protect
the shareholders interest.

Black, B. S. (2001) investigated the relationship between independent directors

and firm performance Black found a negative correlation between the two variables he
asserted that independent directors inversely impact the business operations as the
independent directors are usually part time directors hence they do not pay proper
attention to their duties, beside this they are given high salaries which is another burden
of shareholders shoulders and their deferent allowances and perquisites more verse the
net income of firm thus the independent directors have negative impact on firm
financial performance. Feng C (2008) using penal data of chines listed companies and
analyzed with correlation matrix and multiple regression model, he concluded that for
fraud minimization, proper use of firm resources and maximizing shareholders wealth
it is very necessary to add independent directors in board which will enhance the overall
business operation and profitability of chines listed companies, he further argued that
CEO duality in chines context has a negative impact on firm performance as one person
hold the two positions there took place a problem of low check and balance and
accountability on chairman side, as the chairman cannot dictate, direct and supervise
the CEO, thus leading to decreasing efficiency and effectiveness of the two position,
the board size in chines context also plays a vital role in improving financial
performance of firm therefore must be manage with due care as the board size can lead
to boom and slump as well.

Fernandes, N. G. (2005) conducted a research on bankrupt chemical firms to

investigate the impact of corporate governance on firm performance, he asserted that
corporate governance practices are the life blood of successful firm and are responsible
for increasing transparency, disclosure, attracting perspective investors, satisfying
existing shareholders, increasing net profit, earning per share, dividend per share, cash
flow and overall business position. Fernandes findings revealed that in bankrupt
chemical firm the major influential factors of bankruptcy was the lack of governance
practices that provide the management with sufficient opportunities of fraud and
misappropriation of firm assets. He further argued that it is very crucial to have an
effective board of director in all aspects, there must an adequate size of the board
depending on size of company, the board must be diverse on the ground of skill,

17
knowledge, expertise and intellectual abilities, there must be independent directors in
board who are independent of management and are also not profit seeking shareholders.
There must be a sound internal control system and audit committee in firm and there
must be separated CEO and chairman of the firm.

Guest, P. M. (2008) investigated UK listed firms to understand the impact of

board characteristics in firm accounting ratios, the scholar found that there exist a
positive correlation between the two, Guest asserted that independent directors in board
plays the role of judge between the management and shareholder thus safeguard both
principal and agents, the independent directors in board must be at least one third of the
board size but more than this ration will contribute in good manner and further
accelerate the performance of firm, minimize agency problem and smoothen business
position.

Jiang, D. (2009) conducted a research on independent directors and cost of

corporate finance, he argued that far beneficial to have more and more of independent
directors in board for the success of business but the problem with independent directors
is their high salaries, perquisites, allowances and other facilities that becomes an extra
Burdon on shareholders shoulders, thus the scholar recommended that independent
directors have positive impact not only on firm performance but overall business
operations but it increases the corporate finance cost of firm.

18
2.6 Audit Committee and Financial Performance

Wild, JJ( 1994) conducted a study on some of the listed companies of srilanka
stock exchange to know the impact of audit committee on firm performance. He argued
that there exist a positive relationship among the establishment of audit committee and
firm performance. His findings further indicated that presence of audit committee has
strong and significant impact over the smoothness of firm performance. Laing, D &
Weir, CM (1999) studied the role of audit committee in firm performance. For this
purpose he used regression and came to know that companies having their strong audit
committee performed better than those without proper audit committee. Petra, ST 2007,
conducted a study of New York stock exchange and pointed out that the shareholders
are motivated more because of the presence of strong audit committee. He concluded
that those companies having strong audit committee, their financial information are
considered to be more reliable and trustable. Davis, SM (2002) conducted a study on
srilankan stock exchange. He asserted that shareholders are able to have greater
confidence in the companies of the practicing of independent audit committee. He
studied its impact on firm performance through regression and narrated that investors
are stimulated more because their right will be saved and they will get relevant and
timely information because of audit committee. His findings showed a strong and
significant influence of audit committee on firm performance. He asserted that
existence of accurate audit committee will save the companies from insolvency and
loss. He viewed that audit committee plays a pivotal and important rule in the success
of a firm. He noticed that audit committee will safeguard the rights of shareholders and
investors and will save the company from fraudulent and embezzlement. He run
correlation and came to know that audit committee positively contributed in firm
performance. His findings further showed the strong and significant impact on the firm
performance. (Klein, 1998) noticed that financial fraud can be potentially minimized
through proper audit committee monitoring system which will lead to shareholders
confidence and value of the firm. He proclaimed a strong and positive influence of audit
committee on firm performance. His findings indicated that companies having strong
audit committee functioning well in the stock market as compare to that how don’t have
such committees. Weir and Laing et al (2002) studied listed companies and run
regression to know the effect of audit committee on the firm performance. He
proclaimed that audit committee had no effect on firm performance.
19
 Weir and Laing et al. (2002) conducted their study on the stock market
performance Sidney stock exchange. He took 40 listed companies for sample. He went
through various elements which contribute in the firm performance and asserted that
audit committee structure had no effect on the company performance. Their findings
showed that board size and board structure contribute more as compare to the audit
committee in the firm performance. They suggested that companies should have strong
board composition and structure to monitor the internal operation of the company
properly and may also make strong strategy for the company survival. . Kiel, GC &
Nicholson, GJ ( 2003)conducted a study on new york stock exchange and selected 120
samples of selected companies. He noticed that fraud and embezzlement occur in the
companies because of weak internal control system due to which existing shareholders
want to withdraw their shares while the prospecting investors divert their attention from
these companies. He suggested paying proper attention to improve internal control
system by way of establishing a strong and accurate audit committee. Khanchel, (2007)
conducted his research study on chines stock exchange. He proclaimed that strong audit
committee plays a vital rule in success of firm performance as compare to other factors.
he viewed through regression that audit committee has strong and significant impact
over the firm performance as it exercises its duties well and show the true and real
pictures of the various activities performed in the company. He suggested that listed
companies should pay due concentration towards audit committee to make it more
active to discharge its duties well. His findings showed that there exists a significant
influence on the firm performance.

Carcello, JV & Neal, TL (2000) went through the Jordan stock exchange and
selected 60 listed companies for their research. They argued that board size, board
composition and audit committee are the pillar factors of the success of firm
performance. They noticed that if these factors are strong and enough active the
shareholders right will be protected and the company will be functioning well. They
proclaimed that these factors will bring transparency in the firm performance. They
concluded that audit committee has strong impact over the firm performance while
board size and board composition has moderate influence on the firm performance.
Weir and Laing et al. (2002) studied the Austrialian stock exchange and narrated that
corporate governance has strong impact on the firm performance. They argued that
fraud disclosure and minimization of embezzlement in the company is possible through

20
strong audit committee. Audit committee should consist of independent auditors who
may give their opinion about the operational activities of the firm. Audit committee will
help to overcome the agency problems which will lead to transparency in the firm
performance. Their findings showed a significant impact of audit committee on the firm
performance.

Al-Twaijry, M. Brierley, A. and Gwilliam, R. (2002).conducted their study on

Saudi Arabia stock exchange. They pointed out the relationship of audit committee and
performance. They described about audit committee that audit commitee safeguards the
rights of directors and shareholders. Further they asserted that the presence of audit
committee will remain the current shareholders while gives green signals to the
prospecting investors because perspective investors believe in transparency, however it
is possible because strong establishment of audit committee. Their findings reveled the
significant and positive impact of appropriate audit committee on the firm performance.
Defond, Mark L., Rebecca N. Hann and Xuesong Hu, (2005) conducted their study
using the selected firms of srilanaca. They asserted that corporate governance play a
vital and significant rule in the firm performance. Their findings showed that strong
corporate governance can boost up the company’s performance and goodwill. They
found that audit committee is obviously a strong shield by which they may safe
themselves from solvency and failure. Their conclusion showed that strong audit
committee on the part of company put significant impact on the firm performance and
make the company prosperous and progressive and may enlarge the volume of the
investors. Karamanou, I. and Vafeas, N. (2005).did their study on chines stock
exchange and selected 150 listed companies. They argued that smooth fluency in the
firm performance is associated with accurate audit committee. They run correlation and
regression and came to that audit committee is positively contribute in firm
performance. They concluded that there exist strong and positive relation between audit
committee and firm performance. Hegazy, M and Hegazy, K. (2010).

Audit committee is essential for the company to survive and to win the trust and
confidence of the investors and shareholders. they went through the stock exchange of
Scotland and studied the performance of all the listed companies and realized that those
listed companies who are doing their operation in the supervision of audit committee
are more considered more trustable in the eyes of shareholders and directors. their

21
studies showed that although there are also some other elements who like board size,
board structure and board diversity but the share of contribution of audit committee is
more in the firm performance. They concluded that further attention and focus should
be paid to the audit committee to make it more effective and efficient just for the best
interest of both the company’s performance and shareholders. They proclaimed that the
relationship between audit committee and firm performance is enough strong and
positive. they asserted that this is only the audit committee who safeguard the rights of
share holders and pointed out the fraud and theft in the company and thus it will make
the company more reliable and strong.

Ontario liel (2011a), conducted his study on the corporate governance and firm
performance. He asserted that the profitability and consistency of the firm is depend on
the strong internal control and internal control can be made better because of the strong
audit committee. He proclaimed that investors and shareholders strive for accurate and
correct picture of the company financial statement. His concluded that if the audit
committee of any concern is strong and effective then the value of shareholders will
also be strong. His studied showed the comparison of the listed companies and found
that the value of the firm performance is much more strong and reliable as compare to
those companies whose audit committee is not consisting of liable and competent
independent personnel’s. Beasley (2010) proclaimed and conducted his study and
pointed out that the presence of audit committee will lead the company towards
positivity. He asserted that companies usually don’t show the true picture of their
financial statements due to which the trust and confident of the shareholders and
investors lost which put bad impression on the consistency and profitability of the firm.
He proclaimed that audit committee is significantly influence the value of firm. He
suggested that there should be independent members in the audit committee who may
give independent opinion about the documentary evidence of the company and thus
will motivate the prospecting investors for investment and the current investors will not
withdraw their share of investment from the company as they will see transparency in
the operation of the company operation.

Conyon, M. and Mallin, C.,(2010)conducted their study to evaluate the impact

of corporate governance on the firm performance of the china stock exchange. They
pointed out the some of the listed companied of the china stock exchange went to

22
liquidation because inappropriate policies regarding board size, board structure and
weak audit committee. They stated that all these play a vital role in the company’s
operation and further showed that maximum of the shareholders of these listed
companies diverts their attention due inappropriate internal structure. They asserted that
there exists a close relationship among firm performance, board size, board structure
and audit committee. They concluded that all these three factors play a vital and
significant rule in the firm prosperity and firm performance. Conyon, M. and Mallin,
C.,(2011) conducted their study and deeply studied the financial performance of the
listed companies. They asserted that every company should have an independent audit
committee compose of independent members which may thoroughly study the financial
statements of the company. They narrated that competent audit committee can route out
the weaknesses and fraud occurring in the company. They further asserted that strong
and competent audit committee can easily soul the agency problems. Conyon,
M.(2011)conducted his study on listed companies in UK stock exchange. He asserted
that audit committee is one of the most prominent factor for the company’s survival.
He narrated that most of the companies in United Kingdom were enjoying a goodwill
in the market and their market shares were also demanded by the public, and it was just
because of the effective internal control system. He also described the rules of other
factors like board size, board structure but he mentioned that audit committee factor
was more progressive in the firm performance. He compared the shares the market
shares of various companies through surveys and came to know that people are eager
to invest in those companies whose audit committee is enough strong and effective. He
suggested that companies should have their own independent audit committee and this
committee should compose of independent members who can easily get access to the
financial statements and other documents of the company and any prepare reports. He
concluded that audit committee has strong and significant impact on the firm
performance.

2.7 Managerial ownership, Institutional Ownership and Firm

performance

These are the mangers who manage as well as own the firm shares. Berle and
Means (1932) introduced this concept. They argued that firm should have agents to
represent the shareholders. Their finding led to the agency problem. The principal who

23
get appoint the agent to maximize shareholder wealth. Jensen and Meckling argued that
it can be reduced by the low shareholder value to these agents. But many researchers
argued letter on that it is very vital for the firm. As when shareholding decreases it than
minimize the value of the firm. So, if the managers have good share in the firm they
will definitely give attention and the firm value will be increased than.. Studies on the
subject of managerial shareholding found that it give advantages to the firm. As they
show interest towards the firm. They found that it can be negative as well as they give
attention to their personal interest rather than the firm value maximization. They said
that if the agency cost is minimize and bring alignment in agent and principal
relationship it can be vital than. They also argued that if the share of the mangers are
minimized it will adversely affect business performance because of the low attention to
the business affairs. So there is contadictionary view about managerial ownership
concept.

This particular concept was challenged by McGregor (1967) and Davis et al

(1997). They told that there is no such problem between management and principal .
They believed that professional managers always work for the organization interest as
they believe that firm satisfaction is their own satisfaction. This attitude of the manager
brings contradiction with old theories. They believe that managers have high level of
loyalty and commitment with the firm.

Wild, JJ( 1994) conducted a study on some of the listed companies of srilanka
stock exchange to know the impact of managerial ownership on firm performance. He
argued that there is exist a positive relationship among the establishment of managerial
ownership and performance. His findings further indicated that managerial ownership
has strong and significant impact over the smoothness of firm performance. Laing, D
& Weir, CM (1999) studied the role of managerial ownership in firm performance. For
this purpose he used regression analysis to find impact and came to know that
companies having their managerial ownership checkout performed better than those
without managerial ownership checkout in corporate governance. Petra, ST (2007)
conducted a study on New York stock exchange and pointed out that the shareholders
are motivated more because of the presence of managerial ownership structure. He
concluded that those companies having their managerial owners, financial information
are considered to be more reliable and trustable. Davis, SM (2002) conducted a study

24
on srilankan stock exchange. He asserted that shareholders are able to have greater
confidence in the companies of the practicing the managerial ownership checkout.. He
studied its impact on firm performance through regression and narrated that investors
are stimulated more because their right will be saved and they will get relevant and
timely information because of the managerial owners. His findings showed a strong
and significant influence of managerial ownership upon performance.

Klein, A (1980) conducted his study on listed companies of Sydney stock

exchange and went through the relationship between managerial ownership and firm
performance. He asserted that managerial ownership plays a pivotal and important rule
in the success of a firm. He noticed that MO will safeguard the rights of shareholders
and investors and will save the company from fraudulent and embezzlement. He run
correlation and came to know that managerial ownership has positively contributed in
firm performance. His findings further showed the significant impact on the firm
performance. (Klein, 1998) noticed that managerial ownership will lead to shareholders
confidence and value of the firm.. (Laing & Weir 1999).conducted a study to know
about the effect of MO on the firm performance and noticed that there is moderate
impact of MO on the firm performance. Weir and Laing et al. (2002) conducted their
study on the stock market performance Sidney stock exchange. He took 40 listed
companies for sample. He went through various elements which contribute in the firm
performance and asserted that MO has insignificant effect on the firm performance.
Their findings showed that board size and board structure contribute more as compare
to the MO in the firm performance. They suggested that companies should have strong
board composition and structure to monitor the internal operation of the company
properly and may also make strong strategy for the company survival. They proclaimed
that contribution of board size and board composition are more as compare to MO and
hence showed an insignificant on the firm performance. Kiel, GC & Nicholson, GJ (
2003)conducted a study on new york stock exchange and selected 120 samples of
selected companies. He noticed that proper attention to improve internal control system
by way of establishing a managerial ownership structure.

Khanchel, (2007) conducted his research study on chines stock exchange. He

proclaimed that strong managerial ownership plays a vital role in success of firm
performance as compare to other factors. he viewed through regression that MO has

25
positive significant impact over the firm performance as it exercises its duties well and
show the true and real pictures of the various activities performed in the company. He
suggested that listed companies should pay due concentration towards managerial
ownership to make it more active to discharge its duties well. His findings showed that
there exists a significant influence on the firm performance. Carcello, JV & Neal, TL
(2000) went through the Jordan stock exchange and selected 60 listed companies for
their research. They argued that board size, board composition and managerial
ownership are the pillar factors of the success of firm performance. They noticed that
if these factors are strong and enough active the shareholders right will be protected
and the company will be functioning well. They proclaimed that these factors will bring
transparency in the firm performance. They concluded that MO has strong impact on
the firm performance while board size and board composition has moderate influence
on the firm performance. Weir and Laing et al. (2002) studied the Austrialian stock
exchange and narrated that corporate governance has strong impact on the firm
performance. They argued that MO practices will further improve the corporate
governance. Al-Twaijry, M. Brierley, A. and G william, R. (2002).conducted their
study on Saudi Arabia stock exchange. They pointed out the relationship of managerial
ownership with firm performance. They described that MO provides safeguard to the
rights of directors and shareholders. Further they asserted that the presence of audit
committee will remain the current shareholders while gives green signals to the
prospecting investors because perspective investors believe in transparency, however it
is possible because strong establishment of MO. Their findings reveled the significant
and positive impact of appropriate MO on the firm performance.

Defond, Mark L., Rebecca N. Hann and Xuesong Hu, (2005) conducted their
study using the selected firms of srilanaca. They asserted that corporate governance
play a vital and significant rule in the firm performance. Their findings showed that
strong corporate governance can boost up the company’s performance and goodwill.
They found that MO is obviously a strong shield by which they can improve
performance. Institutional ownership is the sort of institutions which invest in the
company shares in order to have greater influence on the affairs and management of the
firm and improve shareholders wealth. Anderses Alonso (2007) argued that
institutional ownership is very vital for the firm as it develop the public trust and
confidence in buying the firm shares. He found that that it is positively correlated with

26
the firm performance. Milliken and martin (1996) found that institutional ownership is
insignificantly effecting the financial performance of the firm. . Al-Twaijry, M.
Brierley, A. and Gwilliam, R. (2002) conducted a research study and found that
institutional ownership has positive correlation with the financial performance of firm.
He argued that institutional ownership has positive impact on the financial perform. Hu
(2005) found that chinees firms performance is improved by the institutional owners.

2.8 Board size and firm performance

Agrawal, A. and Knoeber, C. R. (1998) conducted a study on politics, outside

directors and firm performance. They used the penal data of 225 manufacturing firm
using ROA, ROE, ROI and Tobin’s Q for accounting performance measurement using
multiple regression model, they found that corporate governance is positively
correlated to accounting ration of listed companies, while the board independence,
board size, board composition and audit committee has positive impact of quality of
corporate governance that ultimately impact the profitability of firm due to efficient
effective and in time strategic decision making and transparency of business operations.
The researcher found that the expansion in board will not have a significant impact on
the financial performance of the firm.Weir and Laing et al. (2002) studied the
Austrialian stock exchange and narrated that corporate governance has strong impact
on the firm performance. Their findings concluded that the board size is very vital for
the smooth operation of the company. He argued that lager board poses problems for
the company and thus they found that larger board has negative insignificant impact on
the financial performance of the firm.

Defond, Mark L., Rebecca N. Hann and Xuesong Hu, (2005) conducted their
study using the selected firms of srilanaca. They asserted that corporate governance
play a vital and significant rule in the firm performance. Their findings showed that
strong corporate governance can boost up the company’s performance and goodwill.
They found that smaller the board size of a firm the better the understanding in the
board and hence will positively significantly effect the financial performance of the
firm. Klein, A (1980) conducted his study on listed companies of Sydney stock
exchange and went through the relationship between managerial ownership and firm
performance. He found that larger board will have positive effect on the financial

27
performance as larger board will help in best census on a best opinion which will prove
for the strategy for the firm.. Al-Twaijry, M. Brierley, A. and Gwilliam, R.
(2002).conducted their study on Saudi Arabia stock exchange. They pointed out the
relationship of board sizewith firmperformance.He found that board size has
insignificant effect on the financial performance of board.

2.9 Corporate Governance in Pakistan

. This was really considered a good move towards safeguarding the interest and
protection of both shareholders and stakeholders through impacable and good
accountability and transparency. Keeping in view the world wide corporate fall and
scandals in corporations , trust and confidence , the security and exchange commission
promulgated the the first corporate governance code in 2002 , which made compulsory
for all stock exchanges and corporations to follow certain rules and regulating regarding
governing the affairs of the firms. This code has a number of rules and regulation which
need to followed by all firm in order to protect both shareholders and stakeholders
interest, trust and confidence. These can be achieved through good corporate
governance practices by different public limited companies. This corporate governance
code makes it mandatory that all firms should perform all its corporate governance
affairs in best transparent way and perform their responsibility in the best interest of
shareholders and stakeholders. And thoroughly the interest of shareholders and
stakeholders protected at any cost. The best corporate governance practices as per the
described corporate code 2002 , the government of Pakistan trying to motivate the
foreigners investors as well. These CG practices as per corporate governance code make
sure the interest of shareholders and stakeholders.

2.9.1 2012 Governance Code

As per this code it is necessary for all firms to comply with a statement which
contain all details of corporate governance as per the code and firm need to be abided
by the rules and regulations mentioned in the code. This statement is like an undertaking
which contain the principles and the firms need to follow it with spirit and devotion.
The companies need to publish all of its information in their annual reports so that to
get confidence, interest and trust of its shareholders and stakeholders. The full

28
disclosure really helps in all the shareholders and stakeholders. This compilation
statement of public limited companies which is shown in the annual reports of
companies representing the CG practices shall be examined by the audit committee in
annual audit and will be certified by statutory auditors in audit accounts for the
disclosure purposes.

The board arrangement:

The Director who can holds posts chief in other firm

The documenting of causal opening.

The forces, capacities and obligations of BOD

The gatherings

The critical issues to be examined by board in gatherings.

The Related gathering business exchanges

The Directors preparing and bolster program

29
 The methodology of the arrangement and evacuation of Chief budgetary
officer and other vital position holders like organization secretary, head of inside review
division and others.

The Professional capabilities of both Chief Financial Officer and

Internal Audit Department Head necessity

The technique of Attendance prerequisites for Board of Directors in

gatherings

The corporate detailing and back methods

The Remuneration of chiefs issues

The detailing of budgetary data

The Corporate consistence and fund revealing duties

The Shares of a Director in other Holding Co and revelation techniques

Different kind of advisory groups of the directorate

30
 The methodology for Audit board of trustees. Its gatherings , recurrence
, participation and different terms, inward review and outside review.

In Pakistan the code of Corporate Governance was presented in2002.

Furthermore, than updated in 2012.

2.9.3 Cross Comparison of 2002 and 2012 Codes

The concise examination as pursue.

Freedom of Board of Directors in 2002 was characterized as " the governing

body of open restricted organizations in Pakistan were required to have somewhere
around one autonomous chief as their board part" But the equivalent in 2012 When the
code was overhauled it was made mandatory to have one free executive on the top
managerial staff and was recommended that 33% of the board ought to be from
autonomy sources.

Paradigm for appraisal of freedom in 2002 was extremely an exceptionally

lacking criteria for the point of evaluating the board autonomy where as in 2012 similar
criteria was reconsidered and was exhausted

Official Directors of an organization in 2002 speaks to be at the very least 33%

however in code of 2012 it was made compulsory that it ought to be 75% at any cost
comprehensive of Chief Executive Officer

31
 Add up to Number of directorships Earlier in 2002 was " a chief of an open
constrained organization was bound not to be an executive in excess of ten open
restricted organizations recorded on stock trades of Pakistan at once".

In 2012 the reexamined code of corporate governance characterized the

aggregate number of directorships "to be held by a chief was made significantly more
strict as an executive of an open restricted organization was bound not be an executive
in excess of seven open constrained recorded organizations. Nonetheless, this condition
was loose to the degree this was not material to those directorships in people in general
constrained recorded backups of a recorded holding organization"

Assessment of Board of Directors in 2002 there was no criteria for the

assessment of the governing body. Be that as it may, in 2002 the changed code of CG
it was made a through technique for the assessment of board exhibitions and different
exercises on yearly premise.

The workplace of the Chief Executive Officer or Chairman was in 2002 as "The
Chairman of an open constrained organization was before required to be chosen from
the non-official executives and there was no bar with respect to the duality of CEO and
Chairman. Also, same individual could possess both the places of an open restricted
organization" But in 2012 it was " particularly said and made required that the Chief
Executive Officer and the Chairman can't be a similar individual until or except if
particularly specified in some other law in power". The methodology for race of
Chairman stayed as in 2002.

Top managerial staff Training and Development was characterized as "The

Directors of an open restricted organization were will undoubtedly get accreditation
from the Pakistan Institute of Corporate Governance (PICG) which was approved in

32
such manner to grant preparing to executives". In any case, later the Securities and
Exchange Commission of Pakistan concocted foundation for preparing organizations
whose preparation and affirmation can be considered as per their necessities and the
state of PICG was pulled back. Later in 2012 characterized as " it was made required
for the executives of an open restricted organization to secure affirmation from any
establishment whether neighborhood or global which offer diverse preparing programs
for chiefs". Just a single condition was forced that those foundations and their
preparation projects ought to be as per the predefined model by the Securities and
Exchange Commission of Pakistan and such rule was likewise made accessible on the
site of SECP.

Basis for capability, arrangement and evacuation of Chief Financial Officer and
Company Secretary in 2002 were " the terms of work in regard of Chief Financial
Officer alongside its arrangement, expulsion, compensation was the area of CEO office
and he was required to get board's endorsement consequently" .But in 2012 "every one
of the issues relating to the business, compensation, arrangement together with the
terms and states of work of the CFO and friends secretary and also the leader of the
inner review bureau of open constrained organizations were given under selective space
of the top managerial staff and same technique was required to be followed if there
should arise an occurrence of expulsion of CFO or organization secretary".

Inward Audit Department Head in code of corporate governance 2002 there

were no conditions were endorsed with respect to the capability of interior review office
head. Yet, in 2012 Certain capability were made compulsory..

2.9.4 Rules of Corporate Governance

The board Composition

33
 CEO duality of the CEO.

The Board of Directors' capacities, forces, obligations and duties

The gatherings BOD

Subject matters to be considered by board

The component of Performance evaluation

Related party business exchanges

The Board learning and introduction

How to Form the board panels

Appointment/expulsion of the Chief money related officer, organization

secretary and boss interior inspector

Chief money related officer , his job, capability

34
 The Attendance and different techniques of executive gatherings and
prerequisites thereof

The chief reports to investors

The installment and Remuneration of the Directors

The Corporate money related revealing and consistence and obligations

The Audit board of trustees

Internal review and outside examiners

2.10 HISTORICAL BACKGROUND AND ORGANIZATIONAL

REVIEW

In beginning time of managing an account it was the genuine loaning

establishment and "Bank" was used as a business community for exchanging of money.
The Origination of managing an account is from the Babylonians time 200 B.C and
develops time to time from Greece and Rome to Germany. "Bank" as got from the Latin
word "Bancus" implying "seat" and the from the Germany word "Back" which implies
then Joint Stock firm". Saving money framework in beginning time was provoked in

35
England and after such bona fide progression of saving money in England, the
fundamental ascent was that of the expanding quantities of the bank development and
utilization of check as medium of paying obligations and in addition medium of trade.
Keeping money is assuming extremely essential job in the economy of every last nation
being it is in charge of the financial up down of the economy. In the historical backdrop
of keeping money we have discovered that jews assume extraordinary job in old time.

The all out disseminations of the banks are because of its capacity and everyday
business and also on the decent variety of business in loaning or speculation activities.

2.10.1 Banks in Pakistan

At the point when the parcel occurred implies after opportunity, the new
Pakistani country was in exceptionally vogue condition they were without resources
and different assets because of which it was especially difficult to set up its own specific
saving money structure. With the goal that it was basic to pursue the primary spot Indian
Independence Act of 1947. In beginning period in Pakistan there were 19 outside banks.
These remote banks product not identified with India. There was edginess of tolerating
control of managing an account and money in Pakistan. For this establishment was
recommended to set up a Central Bank for Pakistan. To full fill the country quintessence
require the State Bank of Pakistan was established on July 1, 1948, thusly giving the
full control of saving money and trade out Pakistan. The most basic errand of State
Bank was to issue cash notes and withdrawal of Reserve Bank of Indian notes.

In the midst of the season of 1956-58 new Pakistani banks were enlisted and
booked as the National Commercial bank restricted, present day credit and Investment
Corporation. For carrying the managing an account into the new time of further
progression, Pakistani Commercial banks were nationalized since January 1, 1974.

36
Neighboring privatization and establishment of business and distinctive banks, private
region was moreover engaged in the field. As taking after the precedent incalculable
and diverse banks have been working furtively since 1991. In 1979 managing an
account battled towards the Islamic keeping money framework and for such religious
necessity achievements that time leader of Pakistan General Zia ulHaqtake the activity
to begin Islamic method of saving money framework in Pakistan.

2.10.2 Islamic Banking framework in Pakistan

Pakistan being a Muslim nation, has the center obligation to battle against
destitution and give a flourish situation to its nationals. For this reason, it has propelled
a few Microfinance banks which offer differing money related plans. These banks give
distinctive plans however the sole object is that to take out destitution from the nation.
Other than these undeniable Microfinance banks, customary banks additionally give
microfinance governances to its clients.

Islam as a religion has quite a bit of spotlight on neediness lightening. The Holy
book, the ahadiths of prophet (PBUH) and the acts of Caliphs of Prophet (PBUH) are
observed to be on same page in giving adequate offices to the natives of Muslim states.
The Quran debilitates the utilization of each other things in an unlawful way; rather it
energizes the trading of sustenance and different blessings lawfully. For example,

The individuals who accept don't eat each other's assets in an ill-conceived way;
You are permitted to do as such just in the event that you have an exchange association
with one another ( Al Quran, al nisa, 29). Quran likewise energizes the progressing of
credits and monetary help of each other in various sections. For instance And do help
each other in Charity and abstain from aiding in terrible exercises ( Al quran,
albaqara,58). The ahadiths of Prophet (PBUH) and his practices additionally center
around the assistance of poor and destitute individuals. The Prophet said like this that
one who is occupied in helping his Muslim sibling Allah settles his everything deeds.

37
Also, Sydna Hazrat Abbas portrays this hadith that when somebody is occupied in
helping his Muslim sibling for a real action, Allah makes his seventy deeds (Al Bukahri,
Babe Sadaqa). Many confirmations can be found in such manner in the Islamic history.
The caliphs of Prophet (PBUH) additionally continued after a similar way. An
outstanding saying of the caliph Hazrat umer is that "even I am in charge of the demise
of a canine because of starvation on the bank of Farat( the name of an ocean)".

In a similar line Akram and Hussain (2011) reasoned that fleeting credits are
imperative instruments for neediness mitigation in creating nations like Pakistan, India
and Bangladesh. It will help in expanding the lives norms of destitute individuals in the
general public. They additionally expressed that the execution of microfinance
organizations is palatable in Pakistan. An examination led by Dusuki (2008) proposes
that the area of Microfinance required some radical changes. The creator contended that
customary methods for loaning must be kept away from in present day Microfinance
plans. He considered social inclusion and gathering based loaning plans to be more
productive and successful than traditional loaning plans. He recommended that
diminishing the expense of loaning and time to process may expand the effectiveness
of microfinance plans. There is a potential issue related with social gathering based
loaning. That is the issue of low recuperation rate of credits. A few elements add to this
issue, incorporating unscrupulousness of borrower as postponed installment of credit,
inappropriate financing framework, social and political impact and so on. Such factors
can ineffectively impact the execution of advance propelling bodies. Awojobi and Bein
(2011) thought about the inadequacy in human, absence of money related assets, non
accessibility of budgetary governances and lethargy as components of destitution.
Among them, the most huge is non accessibility of money related governances. As
indicated by them, a vast portion of society does not partake in financial advancement
of society in any frame. The creators proposed that by bringing this unbanked section
of society in budgetary incorporation can empower them to participate in financial
improvement.

38
 Microfinance division in our nation (Pakistan) can be separated into rule three
arrangements. For example the first part is, huge household bolster program. In the
second part, social occasion of NGOs which are impelling in the assorted urban
networks of a comparable region like Orange pilot Project (OPP). Eventually a greater
number of towns based NGOs which are not most likely comprehend about
microfinance and little access to credit. Due to Riba model of microfinance a sweeping
piece of the populace are not fascinating in it, considering nonattendance resources and
a mind blowing impediment being developed and poverty moderation. With respect to
creating prevalence and need of Islamic financing and microfinance, there is a
remarkable need to put center around Islamic microfinance. With a particular true
objective to oust this Deficiency State Bank of Pakistan gives the exhaustive managerial
structure to microfinance and Islamic microfinance

39
2.9.2 Major provisions of Code of Corporate Governance

2.11 Theoretical Frame work

Independent variablesdependent variables

Corporate Governance
Practices
Board
size

Performance
ROA
ROA
Board independence ROE

CEO duality

Managerial ownership

Institutional ownership

Board Diversity
2.12 Conception of the Model
Audit committee
This conceptual model has been constructed from the researchers like Reddy
(2010),Agyei and owusu (2014), Prasetyo (2011), ugur (2003), Yaser and mansor
(2011) and azeem (2013),Sanda et al., (2005),Jensen et al (2004), Nishat et
al,(2004).Watawala, (2006) Spanos,( 2005) and abdullahalam and zulfiqar (2013). All
the facets and dimentions have been taken from the conceptual frame work of these
researchers .There has been made newness through calculation of the variables.

2.14 Measurement and operational definition of variables

Corporate governance variable definition and measurement

40
 Azeem, Hassan and Kouser, (2013) established a set of two type of corporate
structure indexes. One they called the independence and the other they called the board
structure. They analyzed almost 50 biggest firms for the purpose and elaborated the
structure index in managerial ownership, institutional ownership , audit committee and
board independence. They argued that these variables have key effect on the financial
performance of firm. Yasser, Entebang and Mansor, (2011) used a variety of corporate
governance variables like board size, board diversity, managerial ownership, CEO
duality, audit committee and analyzing Pakistani firms. For the purpose. They found
that CG has a key effect on the financial proxis.

1.14.1 Board Size

Board size is the amount of people available in the board we can simply

say that the number of people in a board means board size. The specialists

and all other high authority members of board are included in board size..

2.14.2 Managerial ownership

These are the mangers who manage as well as own the firm shares. Berle and
Means (1932) introduced this concept. They argued that firm should have agents to
represent the shareholders. Their finding led to the agency problem. The principal who
get appoint the agent to maximize shareholder wealth..

Jensen and Meckling. Argued that it can be reduced by the low shareholder value to
these agents. But many researchers argued letter on that it is very vital for the firm. As
when shareholding decreases it than minimize the value of the firm.

1.14.2 Institutional ownership

Institutional investors are associations that have a lot of assets to contribute and they
contribute a sound measure of their assets into organization shares. Anderses Alonso
(2007) contended that institutional possession is extremely indispensable for the firm as it
build up people in general trust and trust in purchasing the firm offers. He found that that
41
it is decidedly related with the firm execution. Milliken and martin (1996) found that
institutional possession is inconsequential affecting the budgetary execution of the firm. .
Al-Twaijry, M. Brierley, A. also, Gwilliam, R. (2002) directed an examination study and
found that institutional possession has positive relationship with the budgetary execution
of firm. He contended that institutional possession has positive effect on the budgetary
perform. Hu (2005) found that chinees firms execution is enhanced by the institutional
proprietors.

In 1988 Pound considered institutional possession with proposed three theories.

1. Institutional proprietors are firms, gathering of individuals who take reserve funds
from the people and put resources into different firms. Furthermore, it has indispensable
for firm execution..

2. second theory tells that institutional proprietors should essentially agree with the
governance in the event of other beneficial business adventures.

3. Third speculations express that at times the governance and the institutional
proprietors begin to participate one and another with the end goal to profit one another.
The shared collaboration for their own advantage results in the decline of estimation of
the firm. This happens on the grounds that now just little part of the investors are viably
checking the governance. This speculation is known as key arrangement theory.

Key arrangement and irreconcilable situation theory both adversely influence the
connection between the firm budgetary execution and its institutional possession. This
implies institutional proprietors ought to be constrained to control in a leading group of
the firm with the goal that vital arrangement and irreconcilable circumstance ought to be
evaded.

Anyway it truly lessen exchange cost. A few specialists as Berle and Means (1932)
recommended that institutional proprietorship helps in limiting exchange cost and also it
42
expels organization issue all things considered. In this reaserch institutional possession
has been computed as the quantity of offers claimed by different organizations and
financial specialists inbulks.

2.14.5 CEO Duality

In this examination consider the CEO duality alludes to that, CEO of the organization
some time have double obligations, implies that being a seat man of the BOD and CEO
also. This duality have certain favorable circumstances and burdens, similar to it shapes
the firm with better command over the basic leadership however then again may
debilitate the governance jobs of the board.

The vast majority of the specialists have conflicting perspectives about the CEO duality.
The majority of them seeing that it give corporate power and tight control, which than
exceptionally supportive in making smooth development in term of productivity and
objective accomplishment in facilitate way. In any case, some contends that the
autonomous board can enhance the execution of the firm. Anderson and Anthony,
Charan, Boyd (2008) contended that CEO duality has positive effect on the execution of
the firm. In any case, a portion of the analysts found that it has negative connection with
the monetary execution of the firm.(Carlsson, Worrell, Lorsch,2006. In this examination
sham factors have been utilized. 1 for director and CEO filling in as one in the meantime
0 in other case.

2.14.6 Board Independence

Sheets of chiefs comprise of two sorts of executives; insiders and outcasts. There is still
disarray that to accomplish ideal board creation, how much level of each kind of chief
ought to be available. Corporate board is the summit of inner corporate governance
instrument. (Brennan; 2006) Board of chiefs has the obligation to screen the governance
and deal with their rights in the interest of investors. (Jensen and Mecking, 1976). Outside

43
 chiefs are the individuals who work in different firms and have different duties also.
Inside chiefs give data and the outside executives give their mastery to assess the choices
of administrators. Here in this exploration board autonomy implies the quantity of
autonomous chiefs in the leading group of the bank.

2.14.7 Audit committee

Audit committee and RiskWild, JJ( 1994) conducted a study on some of the listed companies of srilankan
stock exchange to know the impact of audit committee on firm performance. He argued that there exist a
positive relationship among the establishment of audit committee and firm performance. His findings further
indicated that presence of audit committee has strong and significant impact over the smoothness of firm
performance. Laing, D & Weir, CM (1999) studied the role of audit committee in firm performance. For this
purpose he used regression and came to know that companies having their strong audit committee performed
better than those without proper audit committee. Petra, ST 2007, conducted a study of New York stock
exchange and pointed out that the shareholders are motivated more because of the presence of strong audit
committee. He concluded that those companies having strong audit committee, their financial information are
considered to be more reliable and trustable. Davis, SM (2002) conducted a study on srilankan stock exchange.
He asserted that shareholders are able to have greater confidence in the companies of the practicing of
independent audit committee. He studied its impact on firm performance through regression and narrated that
investors are stimulated more because their right will be saved and they will get relevant and timely
information because of audit committee. His findings showed a strong and significant influence of audit
committee on firm performance. Koh, P.-S., Laplante, S. K. and Tong, Y. H. (2007) conducted a study of
chines stock market. He asserted that uses of audit committee will increase firm performance and improve the
quality of corporate governance. His finding showed that audit committee increases corporate transparency to
align the managerial activities with the best interest of shareholders. Klein, A (1980) management committee
- review the financial conditions of the banking institution. In this research the audit committee has been
calculated as the number of non executive director in the board of the committee.

2.15 Financial performance variable definition and measurement

Firm’s financial performance means that how a firm is operating i.e. earning
profit or suffering loss over the time. Barbosa (2005) used financial performance as
return on investment, earning per share, growth in sales , market capitalization, residual

44
 income, dividend yield and price earnings ratio. Chakravarthy, (1986) used in the form
of the firm sale , return and efficiency. Financial performance here is represented
through the following proxies.

2.15.1 ROA (Return on Assets).

In this researchthis proxy has been measured and calculate as follow.

ROA= Total Net profit/ Total assets

2.15.2 ROE (Return on Equity)

It has been calculated as follow..

ROE= Total net profit/ total shareholder equity
2.16 Research Hypothesis

The hypotheses obtained after the literature review are presented as follows:

H1: There is a significancerelationship between the corporate governanceand

financialperformance of conventional banks..

H10: There is a no significance relationship between the corporate governance and

financial performance of the conventional banks.

H2: There is significance relationship between the corporate governance and financial
performance of conventional banks.

H20: There is no significance .relationship between the corporate governance and

financial performance of Islamic banks..

2.17 Research model:

The following models have been applied for both conventional and Islamic banks.

1. ROA=β0+β1Boradsize+β2Boardindependece+β3CEOduality+β4mangerial ownership
+β5Audit committee+β6 board diversity+B7 institutional ownershipµ

45
2. ROE=β0+β1Boradsize+β2Boardindependece+β3CEOduality+β4Managerial
ownership+β5Audit committee+β6 board diversity+B7 institutional ownershipµ

46
 Chapter-3

RESEARCH METHODOLOGY

3.1 Types of research

Usually research is defined as the investigation being conducted for the solution
of any research problem. Research is always carried out to find solution for a problem.
Research has been divided into many categories like on the bases of application,
objectives and inquiry. On the bases of application research is like pure and applied
research. Research is divided into Explanatory, exploratory, descriptive and
correlational research on the bases of objectives. On inquiry bases research is like
quantitative and qualitative research. It is an applied research and correlation research
study as all variables will be quantitatively qualified and further described.

3.2 Population and Sampling

The population of this research includes all Islamic and conventional banks
registered in Karachi stock exchange . Researchers have different opinions about the
observations and respondantants to include in the data analysis of the research. Tatham
(1998) explained that any research must be conducted using at least one hundred
samples or observations to obtain proper statistical significant results. Simply he found
that the meaningful results can be obtained on the bases of one hundred observations
not less than this figure.. But saunders et al(2009),argued that the maximum the number
of the sample size the true the representation of the population and hence the true the
results based on sample representing the population. In this research random sampling
techniques has been used for the collection of data.

The following sample banks has been included in this research study.

47
 S. No Islamic banks Conventional banks
1 Albaraka Bank Allied bank
2 Bank Islamic Muslim commercial bank
3 Burj Bank Alfalah bank
4 Dubai Islamic Bank Bank of Khyber
5 Meezan Bank Habib bank limited
6 Bank Alfalah Islamic United bank limited

3.3Panel Data Collection

Data collection is very important phase of the research. Usually researchers collect data
through primary and secondary methods. The primary sources like questionnaires,
interweaves, group discussions and surveys are used, where as secondary data can be
obtained from journals, newspapers, and books. The data of this research has been
collected from the annual reports of these selectedbanks.State banks balance sheet
analysis of Joint Stock Company and Stock exchange site.

3.4 Statistical tool

For the data analysis of this research the following statistical techniques has been used

1. Correlation
2. Regression
3. T test for comparison of mean

The correlation analysis was conducted knowing the direction and strength of
association between variables, that whether the variable move in positive or negative
direction to each other. The regression analysis was conducted knowing the impact of
independent variable on dependent variable.

48
 Chapter-4

DATA ANALYSIS

4.1 Correlation of conventional bank

Variables ROE ROA BS BIND MGTOWN CED INSTOWN AUDCO BD

ROE 1.000
ROA 0.23 1.000
BS -0.12 -0.062 1.000
BIND 0.14 0.082 0.233 1.000
MGTOW 0.21 0.28 0.098 .067 1.000
CED -0.093 -0.034 .045 .076 0.087 1.000
INSTOW 0.078 0.045 0.23 0.345 0.234 0.178 1.000
AUDCOMM 0.234 0.213 0.245 0.245 0.034 0.098 0.012 1.000
BD 0.067 0.092 0.123 0.123 0.123 0.456 0.089 0.345 1.000

The above table 4.1 show correlation between the dependent and independent
variables of conventional bank. The output indicates that retun on assets and return on
equity have negative insignificnt impact and correlation with de independent variable
of Boad Size it mean that increase in board size with negatively impact the financial
performance of the conventional banks here the financial performance variables are
return on assets and return on equity. Similarly the CEO duality also has same senario
like increase in the CEO duality will negatively effect the financial performanc of the
conventional banks. The remaining dependent variables like Menagerial Ownership,
Institutional Ownership board size and audit commity have positive significant impact
on the financial performance of the convenstional banks. The Board size has positive
but less significant impact on the financial performance of the conventional banks.

49
Table 4.2
Regression
Fixed Effect:
Variables Coefficients Standard error T. values P. values
BS -0.3245 0.2629 -1.234 0.078
BIND 0.2567 0.1908 1.345 0.085
MGTOWN 0.1987 0.0889 2.233 0.002
CED -0.2346 0.6062 -0.387 0.096
INSTOWN 0.1245 0.1008 1.234 0.075
AUDCOMM 0.3452 0.1470 2.347 0.001
BD 0.3213 0.9313 0.345 0.456
R-square 0.26, F value 6.45

The above regression table 4.2 fixed effect indicats the impact of independent
varialbe (Board Size, Board Independence, Manegerial ownership, CEO Duality ,
Institunal Onership, Audit Commity and Board Size) on the dependent variables (Retun
on Assets and Return on Equity). The P value of the board size is more then the criticla
value of 0.215 which is clearly a symtum of negative insignificant impact on the
dependent variables. Its mean that increase in such variable would negatively effect the
result. The Board independence has positive less significant impact as the value of P is
0.085 and T value 1.245. The critical value of t should be more the 2 for significant
result so for. Similarly the Managerial ownership result shows for t value is 2.233 and
for P value is 0.012 which is a good sign and shows a significant positive impact of the
variable one the dependent variable of financial performance. CEO Duality is
negatively impact on the financial performance as the result shows negative sign as well
as the p value is not less then 0.05. The Institunal ownership has positive and less
significant impact on the financial performance of the conventional banks. Moreover,
the results of the audit commity is positive and significant impact on financial
performance of the banks so for, the board size has positive and insignificant impact on
the fianancial performance of the conventional banks. R-square show 16 % change in
dependent variable.

50
Random effect
Table 4.3

Variables Coefficients Standard error T. values P. values

BS -0.4235 0.3148 -1.345 0.078
BIND 0.3567 0.2112 1.675 0.065
MGTOWN 0.2937 0.1253 2.343 0.002
CED -0.3346 0.8645 -0.387 0.416
INSTOWN 0.2243 0.1372 1.634 0.078
AUDCOMM 0.2452 0.0915 2.677 0.001
BD 0.2213 0.4961 0.446 0.651

R-square 0.21, wald chi 4.09

The above regression renadom effect table 3.3 indicats the impact of
independent varialbe (Board Size, Board Independence, Manegerial ownership, CEO
Duality , Institunal Onership, Audit Commity and Board Size) on the dependent
variables (Retun on Assets and Return on Equity). The P value of the board size is more
then the criticla value of 0.05 and the T value less the 1 with a negative sign clearly a
symtum of negative insignificant impact on the financial performance. Its mean that
increase in such variable would negatively effect the result. The Board independence
has positive less significant impact as the value of P is 0.035. The critical value of t
should be more the 2 for significant result so for. Similarly the Managerial ownership
result shows for t value is 1.623 and for P value is 0.012 which is a good sign and shows
a significant positive impact of the variable one the dependent variable of financial

51
performance. CEO Duality is negatively impact on the financial performance as the
result shows negative sign as well as the p value is not less then 0.05. The Institunal
ownership has positive and less significant impact on the financial performance of the
conventional banks. Moreover, the results of the audit commity is positive and
significant impact on financial performance of the banks so for, the board size has
positive and insignificant impact on the fianancial performance of the conventional
banks. R-square show 11 % change in dependent variable.

Husman Fixed random

Test Ho: difference is coefficients not systematic.

Chi 2(3)= 3.33

Prob> chi 1=0.012725

The above husman test reveal that there is random effect in the data as the probability
value is more than 4%. Once the probability value is more than 0.05 it means that a
null hypothesis is accepted and alternate hypothesis is rejected.

4.4 Fixed effect- Random effect when ROA is used as dependent

variable

Fixed effect

R-square 0.21, F value 4.1

Variables Coefficients Standarederror T.values P.values

BS -0.1145 0.1836 -0.6234 0.678
BIND 0.1867 0.2237 0.8345 0.585
MGTOWN 0.1227 0.0433 2.833 0.001
CED -0.1945 0.7284 -0.267 0.996
INSTOWN 0.1287 0.1244 1.034 0.099
AUDCOMM 0.1454 0.0646 2.248 0.001
BD 0.1213 0.2660 0.456 0.456

52
 The above regression fixed effect table 4.4 indicats the impact of independent
varialbe (Board Size, Board Independence, Manegerial ownership, CEO Duality ,
Institunal Onership, Audit Commity and Board Size) on the dependent variables (Retun
on Assets and Return on Equity). The P value of the board size is more then the criticla
value of 0.05 which is clearly a symtum of negative insignificant impact on the
dependent variables. Its mean that increase in such variable would negatively effect the
result. The Board independence has positive less significant on the finanicla
performance. The critical value of t should be more the 2 for significant result so for.
Similarly the Managerial ownership result shows for t value is more the 2 and for P
value is less the 0.05 which is a good sign and shows a significant positive impact of
the variable one the dependent variable of financial performance. CEO Duality is
negatively impact on the financial performance as the result shows negative sign as well
as the p value is not less then 0.05. The Institunal ownership has positive and less
significant impact on the financial performance of the conventional banks. Moreover,
the results of the audit commity is positive and significant impact on financial
performance of the banks so for, the board size has positive and insignificant impact on
the fianancial performance of the conventional banks. R-square show 21 % change in
dependent variable.

Table 4.5

Random effect

R-square 0.23, wald chi 4.34

Variables Coefficients Standared T. values P. values

error
BS -0.1234 0.1193 -1.034 0.096
BIND 0.1456 0.0869 1.675 0.065
MGTOWN 0.1876 0.0800 2.343 0.002
CED -0.2342 0.5239 -0.447 0.816
INSTOWN 0.1238 0.0995 1.244 0.098
AUDCOMM 0.1786 0.0643 2.777 0.001

53
BD 0.0675 0.1477 0.457 0.789

The above regression renadom effect table 4.5 of 2nd module of this study which
indicats the impact of independent varialbe (Board Size, Board Independence,
Manegerial ownership, CEO Duality , Institunal Onership, Audit Commity and Board
Size) on the dependent variables (Retun on Assets and Return on Equity). The P value
of the board size is more then the criticla value of 0.05 which is clearly a symtum of
negative insignificant impact on the dependent variables. Its mean that increase in such
variable would negatively effect the result. The Board independence has positive less
significant on the finanicla performance. The critical value of t should be more the 2
for significant result so for. Similarly the Managerial ownership result shows for t value
is more the 2 and for P value is less the 0.05 which is a good sign and shows a significant
positive impact of the variable one the dependent variable of financial performance.
CEO Duality is negatively impact on the financial performance as the result shows
negative sign as well as the p value is not less then 0.05. The Institunal ownership has
positive and less significant impact on the financial performance of the conventional
banks. Moreover, the results of the audit commity is positive and significant impact on
financial performance of the banks so for, the board size has positive and insignificant
impact on the fianancial performance of the conventional banks. R-square show 23 %
change in dependent variable.

Husman Fixed random

Test Ho: difference is coefficients not systematic.

Chi 2(5)= 4.89

Prob> chi 2=0.0865

The above husman test reveal that there is random effect in the data as the probability
value is more than 5%. Once the probability value is more than 0.05 it means that a
null hypothesis is acpected and alternate hypothesis is rejected.

54
 4.6 Correlation Analysis of the Islamic Banks
Variables ROE ROA BS BIND MGT CED INSTOWN AUDCO BD
OWN
ROE 1.000
ROA 0.23 1.000
BS -0.061 -0.042 1.000
BIND 0.11 0.042 0.222 1.000
MGTOW 0.17 0.21 0.098 .077 1.000
CED -0.043 -0.024 .135 .123 0.098 1.000
INSTOW 0.031 0.042 0.16 0.256 0.342 0.234 1.000
AUDCOMM 0.204 0.183 0.222 0.221 0.123 0.123 0.112 1.000
BD 0.057 0.060 0.223 0.111 0.345 0.2456 0.067 0.267 1.000

The above table 4.6 show correlation between the dependent and independent
variables of conventional bank. The output indicates that retun on assets and return on
equity have negative insignificnt impact and correlation with de independent variable
of Boad Size it mean that increase in board size with negatively impact the financial
performance of the conventional banks here the financial performance variables are
return on assets and return on equity. Similarly the CEO duality also has same senario
like increase in the CEO duality will negatively effect the financial performanc of the
conventional banks. The remaining dependent variables like Menagerial Ownership,
Institutional Ownership board size and audit commity have positive significant impact
on the financial performance of the convenstional banks. The Board size has positive
but less significant impact on the financial performance of the Islamic banks.

55
 4.7 Regression Analysis of Islamic Banks

Fixed effect- Random effect when ROE is used as dependent variable

Fixed effect

Variables Coefficients Standarederror T.values P.values

BS -0.1234 1.3560 -0.091 0.488
BIND 0.1567 0.1546 1.013 0.096
MGTOWN 0.1534 0.0885 1.733 0.056
CED -0.1243 0.2877 -0.432 0.091
INSTOWN 0.1101 1.1712 0.094 0.085
AUDCOMM 0.1253 0.0620 2.020 0.034
BD 0.1147 0.3324 0.345 0.556

R-square 0.19, F value 3.78

The above regression renadom effect table 4.7 which indicats the impact of
independent varialbe (Board Size, Board Independence, Manegerial ownership, CEO
Duality , Institunal Onership, Audit Commity and Board Size) on the dependent
variables (Retun on Assets and Return on Equity). The P value of the board size is more
then the criticla value of 0.05 which is clearly a symtum of negative insignificant impact
on the dependent variables. Its mean that increase in such variable would negatively
effect the result. The Board independence has positive less significant on the finanicla
performance. The critical value of t should be more the 2 for significant result so for.
Similarly the Managerial ownership result shows for t value is more the 2 and for P
value is less the 0.05 which is a good sign and shows a significant positive impact of
the variable one the dependent variable of financial performance. CEO Duality is
negatively impact on the financial performance as the result shows negative sign as well
as the p value is not less then 0.05. The Institunal ownership has positive and less
significant impact on the financial performance of the conventional banks. Moreover,
the results of the audit commity is positive and significant impact on financial
performance of the banks so for, the board size has positive and insignificant impact on
the fianancial performance of the Islamic banks. R-square show 19 % change in
dependent variable.

56
Table 4.8

Random effect

Variables Coefficients Standarederror T.values P.values

BS -0.4235 0.3148 -1.345 0.078
BIND 0.3567 0.2129 1.675 0.065
MGTOWN 0.2937 0.1437 2.043 0.002
CED -0.3346 0.7485 -0.447 0.416
INSTOWN 0.2243 6.5882 0.034 0.078
AUDCOMM 0.2452 0.1336 1.834 0.001
BD 0.2213 0.6395 0.346 0.651
R-square 0 .22,F-value 4.08

The above regression renadom effect table 4.8 which indicats the impact of
independent varialbe (Board Size, Board Independence, Manegerial ownership, CEO
Duality , Institunal Onership, Audit Commity and Board Size) on the dependent
variables (Retun on Assets and Return on Equity). The P value of the board size is more
then the criticla value of 0.05 which is clearly a symtum of negative insignificant impact
on the dependent variables. Its mean that increase in such variable would negatively
effect the result. The Board independence has positive less significant on the finanicla
performance. The critical value of t should be more the 2 for significant result so for.
Similarly the Managerial ownership result shows for t value is more the 2 and for P
value is less the 0.05 which is a good sign and shows a significant positive impact of
the variable one the dependent variable of financial performance. CEO Duality is
negatively impact on the financial performance as the result shows negative sign as well
as the p value is not less then 0.05. The Institunal ownership has positive and less
significant impact on the financial performance of the conventional banks. Moreover,
the results of the audit commity is positive and significant impact on financial
performance of the banks so for, the board size has positive and insignificant impact on
the fianancial performance of the conventional banks. R-square show 22 % change in
dependent variable.

57
Husman Fixed random
Test Ho: difference is coefficients not systematic.

Chi 2(5)= 6.34

Prob> chi 2=0.0690

The above husman test reveal that there is random effect in the data as the probability
value is more than 5%. Once the probability value is more than 0.05 it means that a
null hypothesis is accepted and alternate hypothesis is rejected.

Fixed effect- Random effect when ROA is used as dependent

variable

Table 4.9
R-square 0.17, F value 3.92
Variables Coefficients Standard error T.values P.values
BS -0.1145 0.1837 -0.623 0.663
BIND 0.1467 0.1917 0.765 0.585
MGTOWN 0.1127 0.0557 2.022 0.004
CED -0.1345 0.3695 -0.364 0.986
INSTOWN 0.1187 0.3553 0.334 0.089
AUDCOMM 0.1254 0.0678 1.848 0.056
BD 0.1113 0.3216 0.346 0.234

The above regression renadom effect table 4.9 indicats the impact of
independent varialbe (Board Size, Board Independence, Manegerial ownership, CEO
Duality , Institunal Onership, Audit Commity and Board Size) on the dependent
variables (Retun on Assets and Return on Equity). The P value of the board size is more
then the criticla value of 0.05 which is clearly a symtum of negative insignificant impact
on the dependent variables. Its mean that increase in such variable would negatively
effect the result. The Board independence has positive less significant on the finanicla
performance. The critical value of t should be more the 2 for significant result so for.
Similarly the Managerial ownership result shows for t value is more the 2 and for P
value is less the 0.05 which is a good sign and shows a significant positive impact of
the variable one the dependent variable of financial performance. CEO Duality is

58
negatively impact on the financial performance as the result shows negative sign as well
as the p value is not less then 0.05. The Institunal ownership has positive and less
significant impact on the financial performance of the conventional banks. Moreover,
the results of the audit commity is positive and significant impact on financial
performance of the banks so for, the board size has positive and insignificant impact on
the fianancial performance of the conventional banks. R-square show 17 % change in
dependent variable.

Random Effect

R-square 0.27, wald chi 5.22

Table 4.10

Variables Coefficients Standard error T.values P.values

BS -0.1134 0.0850 -1.334 0.076
BIND 0.1236 0.1221 1.012 0.065
MGTOWN 0.1276 0.0604 2.111 0.002
CED -0.1142 0.0481 -0.237 0.816
INSTOWN 0.1132 0.3281 0.345 0.098
AUDCOMM 0.0756 0.0380 1.987 0.056
BD 0.0375 0.1021 0.367 0.789

The above regression renadom effect table 4.5 of 2nd module of this study which
indicats the impact of independent varialbe (Board Size, Board Independence,
Manegerial ownership, CEO Duality , Institunal Onership, Audit Commity and Board
Size) on the dependent variables (Retun on Assets and Return on Equity). The P value
of the board size is more then the criticla value of 0.05 which is clearly a symtum of
negative insignificant impact on the dependent variables. Its mean that increase in such
variable would negatively effect the result. The Board independence has positive less
significant on the finanicla performance. The critical value of t should be more the 2
for significant result so for. Similarly the Managerial ownership result shows for t value
is more the 2 and for P value is less the 0.05 which is a good sign and shows a significant
positive impact of the variable one the dependent variable of financial performance.
CEO Duality is negatively impact on the financial performance as the result shows
negative sign as well as the p value is not less then 0.05. The Institunal ownership has

59
positive and less significant impact on the financial performance of the conventional
banks. Moreover, the results of the audit commity is positive and significant impact on
financial performance of the banks so for, the board size has positive and insignificant
impact on the fianancial performance of the conventional banks. R-square show 27 %
change in dependent variable.

Husman Fixed random

Test Ho: difference is coefficients not systematic.

Chi 2(5)= 7.89

Prob> chi 2=0.187

The above husman test reveal that there is random effect in the data as the
probability value is more than 5%. Once the probability value is more than 0.05 it means
that a null hypothesis is accepted and alternate hypothesis is rejected.

60
 Chapter-6
FINDINGS, RECOMMENDATIONS AND CONCLUSION
Findings
This research study found the followings from the research study

61
1. The aftereffects of the exploration found that board measure is adversely associated with the
monetary execution of the traditional banks in Pakistan. Implying that as the board measure expands it will
contrarily impact the money related execution of the ordinary banks. The outcomes likewise found that a
similar variable is exceptionally corresponded with the money related execution of the Islamic banks. The
outcomes found roughly a similar conduct of the variable board measure with money related execution of
both regular and islamic banks in Pakistan.

2. The aftereffects of this investigation found that board autonomy is emphatically corresponded with
money related execution of the regular banks. The outcomes likewise found a similar variable decidedly yet
very irrelevantly related with money related execution of the Islamic banks chosen for the examination. The
outcomes found exceptionally close and comparable relationship for the two factors with budgetary
intermediaries of this exploration ponder.

3. The outcomes found that administrative possession is emphatically corresponded with the money
related intermediaries of this exploration for ordinary banks. The outcomes found a similar variable
showing similarly for the Islamic bank as well. So a similar methodology with respect to administrative
proprietorship is performed in both sort of banks compose i.e traditional and Islamic .

4. The outcomes found that CEO duality is contrarily connected with money related execution of the
regular banks. Be that as it may, the effect is inconsequential. A similar kind of results were found for the
Islamic banks as well however the level of relationship is exceptionally powerless with the money related
execution of Islamic banks when contrasted with ordinary banks.

5. The outcomes found that institutional proprietorship is decidedly corresponded with money related
execution of the customary banks of this examination. A similar variable was found decidedly however
irrelevantly related with the monetary intermediaries of this exploration experience . There was slight
contrast in seriousness however nearly a similar pattern was found in both class of banks.

6. The review board of trustees was found emphatically connected with the money related execution of
both kind banks i.e customary and Islamic. It implies that the review advisory group freedom truly guarantee
straightforwardness and responsibility in the firm.

7. The outcomes found that board assorted variety is emphatically however corresponded with money
related execution of the two classes of banks.

62
Suggestions

On the predispositions of discoveries the accompanying suggestions are prompted for this examination .

It is suggested that for more enhanced execution the governance should claim more offers . The governance
if possess more offers will definetly enhance their enthusiasm toward the business tasks of the banks and
they will attempt genuine endeavors for the banks effectiveness , straightforwardness and will put resources
into more gainful business roads to build the investors riches. The best endeavors of the governance for the
best enthusiasm of the banks will improve the estimation of the bank. So more offer holding example of the
governance is recommended for these banks.

The review board of trustees indicating positive huge effect on the money related execution of banks so it is
prompted that bank should center around more free review advisory group , which is involved more
autonomous chiefs. As the review board of trustees guarantee the straightforwardness of the firm framework
which is exceptionally essential for the achievement and development of any firm , especially budgetary
foundation. So both sort of banks should center around more autonomous executives in the review to
guarantee the partners premium. As all financial specialists and partner have confidence in those
organizations which have solid straightforward and responsible framework. These banks both regular and
Islamic ought to support institutional possession as these can be demonstrated as inspiration for the
individual financial specialists. It will give the financial specialist certainty and mettle.

These banks considered for the investigation indicated negative relationship with board measure , so it is
proposed that these banks ought not expand the quantity of individuals in board to the most extreme than it
will cause the contention of conclusion and will endure the bank development and effectiveness.

It is additionally informed on the bases with respect to the discoveries of this examination that banks both
ordinary and Islamic ought to have decent variety in its BOD. On the off chance that they will have Female
individuals in board it will have positive effect on the money related execution.

President duality unimportantly impact the monetary execution of the two banks in this way, these banks
ought to avoide giving double errands to the CEO.

Conclusion

63
The examination was gone for knowing the corporate governance rehearses affect on execution of regular
and Islamic banks. Corporate governance rehearses are not just imperative for smoth running of a
partnership and for straightforwardness too. It gives implicit rules to a framework because of which
company upgrade straightforwardness, responsibility and productivity. These practices can construct the
stack holder certainty and trust, additionally give protectio to financial specialists by killing the organization
issues. The examination utilized settled impact irregular impact OLS to discover the impact of corporate
governance factors on the money related execution of these banks. The information for the time of 2010 to
2014 was utilized. The exploration found that corporate governance truly control and coordinates the firm
productive way. The outcomes uncovered that all corporate governance factors have by one means or
another effect on the money related execution of the bank.

The outcomes found that board size and CEO duality contrarily irrelevantly associated with money related
execution and administrative proprietorship and review advisory group decidedly fundamentally connected
with budgetary execution with a touch distinction for both customary and Islamic banks. Whatever remains
of factors i.e board freedom, institutional proprietorship and board decent variety were found emphatically
inconsequential corresponded with firm execution. The outcomes uncovered that corporate governance has
genuine effect on the firm budgetary execution. All firm ought to pursue the codes of corporate governance.

t clarifieds the preference of forein banks to expand proprietorship stake to be in command of over the bank
doings in the states of frail investor assurance. we discover negative and huge relationship in the middle of
BS and bank productivity which may be because of the way that substantial greater part of banks in our
specimen don't have naming panel, nor predefined progression approach, so they may choose executives that
don't have fundamental experience, aptitudes and mastery. Moreover, BS essentially adversely impact bank
productivity prior and then afterward the event of money related emergency, which could be because of the
capacity of littler sheets to settle on choices speedier in times of amazing instability. Like we expected, the
extent of autonomous executives on the board is adversely identified with bank benefit.

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