Impact of Corporate Governance On Banks: Evidence From Yemen and GCC Countries

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Impact of Corporate Governance on Banks: Evidence from Yemen and GCC

countries
Research · March 2018

DOI: 10.13140/RG.2.2.14936.80645
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Dr-Ahmed M. Al-Baidhani
Universiti Putra Malaysia
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Impact of Internal CG Mechanisms on Bank Performance Ahmed Al-Baidhani
Impact of Corporate Governance on Banks: Evidence from Yemen and

GCC countries
Dr. Ahmed M. Al-Baidhani

PhD, CPA, MBA
1
Abstract
There is no specific optimal corporate governance model that may be applied to all banks
since banks operate under different management, board of directors, ownership
structures, and government regulations. This study examines the impact of internal
corporate governance mechanisms such as board structure, ownership structure, and audit
function as well as other variables such as bank size and bank age on bank financial
performance. The sample of the study consists of both conventional and Islamic banks
operating in Yemen and the six Gulf Cooperation Council (GCC) countries, Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. Regression analysis
(OLS) is used to test the aforementioned impact. The results of this study show that there
is a significant relationship between internal corporate governance and bank financial
performance. Board meetings and bank age have positive and significant impacts on
ROE. Meanwhile, board independence and bank size have negative and significant
impacts on ROA. In addition, bank age and board committees have positive impacts on
Profit Margin while ownership concentration has a negative impact on this profitability
measure. These results are consistent with previous studies. However, the literature
indicate that the above correlation and consequent impact of internal corporate
governance mechanisms on bank performance in developing countries are still not clearly
established.
Keywords: corporate governance, bank performance, board structure, ownership

structure, audit function, profitability, Yemen, GCC countries
2
1 Introduction
Corporate governance is a system used to direct and control an organization. It includes

relationships between, and accountability of, the organization’s stakeholders, as well as
the laws, policies, procedures, practices, standards, and principles which may affect the
organization’s direction and control (Cadbury, 1992). It also includes reviewing the
organization’s practices and policies in regard to the ethical standards and principles, as
well as the organization’s compliance with its own code of conduct.
A corporate governance system refers to a country-specific framework of legal, cultural,

and institutional factors shaping the patterns of influence that the organization’s relevant
stakeholders exert on managerial decision-making. Corporate governance mechanisms
are the methods employed, at the organizational level, to solve corporate governance
problems. Corporate governance has become widely used in the modern business world
today. Striking corporate failures, such as those of Enron, WorldCom, Baring Bank, and
the Bank of Credit and Commerce International (BCCI), have made it a central corporate
topic, with various governments and regulatory agencies making efforts to install strict
governance regimes to ensure the smooth running of corporate entities, and prevent or at
least limit further failures (Basuony et al, 2014).
Since it is viewed as a necessary element of market discipline, strong corporate

governance is highly demanded by investors and other financial market participants
(Ramsay, 2001). Lawmakers in many countries have enacted corporate governance
reforms into law. The United States, for instance, implemented the (Sarbanes-Oxley Act,
2002) which states that in order to safeguard their long-term successes, organizations
implement corporate governance to ensure that they are directed and controlled in a
professional, responsible, and transparent manner. In other countries, such as the United
Kingdom, the corporate governance codes, known as the Combined Code of Corporate
Governance of 2003, are standards of best practice with some indirect regulations
operating through relevant stock exchange listing rules. For the banking sector, Basel I,
3
II, and III are widely applied by both emerging and developing market economies to
improve their corporate governance codes.
Major changes have been made on bank governance during the past couple of decades,
principally due to bank ownership changes, such as acquisitions and mergers (Berger et
al., 2005; Arouri et al., 2011). The global financial crisis of 2008, which started in the
United States, was attributed to the excessive risks taken by U.S. banks. Therefore, in
order to control such risk and limit the agency problem within banks, there are statements
made by bankers, central bank officials, and other related officials, emphasizing the
importance of effective corporate governance in the banking sector since 2008 and until
now (Beltratti and Stulz, 2009; Peni and Vahamaa, 2011). Thus, any similar crisis
occurred or may occur in the future might be attributed to a failure in the bank
governance system. Few studies have concentrated on banks’ corporate governance
(Macey and O’Hara, 2003; Levine, 2004; Adams and Mehran, 2005; Caprio et al., 2007;
Bokpin, 2013; Nyamongo and Temesgen, 2013).
This paper concentrates on conventional and Islamic banks operating in the Arabian
Peninsula in order to provide empirical evidence on the relationship and consequent
impacts of corporate governance on bank financial performance. The data used are
extracted from reliable and credible resources, such as Bankscope database, audited
financial statements, and respective banks’ published reports. In addition to this first
section, this paper is organized as follows: the second section provides a background and
hypotheses development; the research methodology is provided in the third section;
followed by findings and analysis in the fourth section; and finally summary and
conclusion provided in the last section.
4
2 Background and Hypotheses Development
2.1 Background
Corporate governance standards and principles are extracted from local and international
laws, regulations, and rules, as well as from the organization’s bylaws, codes of conduct,
and resolutions. Corporate governance focuses on the control systems and structures by
which managers are held accountable to the bank’s legitimate stakeholders. Traditional
finance literature has indicated several mechanisms that help solve corporate governance
problems (Jensen and Meckling, 1976; Fama, 1980; Jensen, 1986; Turnbull, 1997).
Shleifer and Vishny (1997), for example, focus on incentive contracts, legal protection
for the investors against the managerial self-dealing, and the ownership by large
investors; they point out the costs and benefits of each governance mechanism.
There is a consensus on the classification of corporate governance mechanisms to two

categories: internal and external mechanisms. However, there is a dissension on the
contents of each category and the effectiveness of each mechanism. In addition, the topic
of corporate governance mechanisms is too vast and rich research area to the extent that
no single paper can survey all the corporate governance mechanisms developed in the
literature and instead the papers try to focus on some particular governance mechanisms.
Jensen (1993) grouped corporate governance mechanisms into four basic categories: (1)
legal and regulatory mechanisms; (2) internal control mechanisms; (3) External control
mechanisms; and (4) product market competition. However, Denis and McConnell
(2003) classified corporate governance mechanisms into two categories instead of four,
as follows: (1) internal governance mechanisms including: boards of directors and
ownership structure and (2) external governance mechanisms including: the takeover
market and the legal regulatory system. They use systems as synonym to mechanisms.
Similarly, Farinha (2003) surveys two categories of governance (or disciplining)

mechanisms, the first category is the external disciplining mechanisms including:
5
takeovers threat, product market competition, managerial labor market and mutual
monitoring by managers, security analysts, the legal environment, and the role of
reputation. The other category is the internal disciplining mechanisms which include:
large and institutional shareholders, board of directors, insider ownership, compensation
packages, debt policy, and dividend policy.
It is noticeable that in spite of the differences in the structure of corporate governance, the
basic building blocks of the structures are similar. They include the existence of an
organization, shareholders, directors, accountability and audit, directors’ remuneration,
and the annual general meetings. Hampel (1998), Greenbury (1995), and Cadbury (1992)
called for larger accountability and transparency in areas such as directors’ contracts,
board structure and operation, and the establishment of board monitoring committees.
Additionally, they emphasized the importance of the role of non-executive directors’
monitoring. Meanwhile, Krivogorsky (2006) measured the correlation between corporate
governance and firm performance using only one of the two dimensions, either board
structure or ownership structure.
Considerable research findings on corporate governance and firm performance in non-

financial institutions are also applicable to financial institutions. However, the
governance structure in financial institutions is more complex relative to unregulated,
non-financial firms for several reasons. For example, good corporate governance of
banks requires prudential risk-related regulation and attention to conflicts of interest and
competition issues, particularly given the clear information advantage of banks over their
retail customers. Banks are prudentially regulated and highly levered compared to other
companies and hence bank governance deserves special attention (Adams and Mehran,
2003). In addition, the stakeholders’ interests at banks extend beyond the shareholders’
interests since the bank managers, depositors, creditors, and regulators also have stakes in
such financial institutions. Meanwhile, borrowers have a legitimate claim on banks by
entering in lending agreements; they acquire power and urgency through their cause
being adopted by other stakeholders such as regulators and consumer organizations
6
(Griffiths, 2007). These stakeholders enjoy all three of stakeholder attributes: power,
legitimacy, and urgency (Mitchell et al., 1997; Griffith, 2007). Governments are also
worried about banks reputations, and therefore regulate their governance since a bank’s
failure negatively affects the pertinent country’s economy, and may even spread
worldwide, similar to what happened during the 1997 Asian financial crisis (Pathan et al.,
2008) and the 2008 U.S. financial crisis (Peni and Vahamaa, 2012).
Abu-Tapanjeh (2009) compares the Organization of Economic Co-operation and

Development (OECD)’s corporate governance principles with principles from Islam and
declares them compatible; he points out that Islam as applied to business is entirely
compatible with corporate governance. Honesty and trust that are key ingredients of an
effective governance framework are also basic to ethical behavior in the Islamic Sharia
(Gambling and Karim, 1991; Tan, 2006; Taylor, 2008; Mohammed, 2009).
2.2 Ownership Structure
As they grow, many organizations move from private ownership (family business) to a
publicly-held corporation. This decision may be made due to the need for more equity to
finance such growth. Thus, the role of the owners changes as these family members
become part of a wide group of shareholders who transfer their control (i.e., decision
rights) to the board of directors, and subsequently to the relevant managers who should
act in the shareholders’ best interests (Johnson et al., 2008). Consequently, a corporate
governance framework should be established, comprising a control system that helps
aligning the said shareholders’ interests with the managers’ and directors’ incentives.
Ownership and control structures indicate the types and composition of shareholders in
the organization. However, it should be noted that control is not necessarily an
exchangeable term with ownership because there are other items, such as ownership
pyramids, voting rights, and various kinds of shares that should be considered in this
regard. A bank ownership structure may vary from having just a few owners to having a
7
wide and diversified group of stockholders. Some banks may be managed by controlling
individuals, while other banks may hire independent managers to operate such banks.
Each of these ownership and control relationships may have a strong impact on a bank’s
performance (Johnson et al., 2008). Additionally, ownership concentration and control
are different from one country to another. For example, in the Anglo-Saxon countries, the
institutional investors own, and consequently control, most of the large banks’ shares,
while in Japan most of these shares are owned by financial companies and industrial
corporations. These large investments in the banks give the shareholders the right to
control and monitor the banks’ management (Lehman and Weigand, 2001).
Although concentrated ownership may result in superior performance, it may also result,
negatively, in extracting the bank’s benefits by the controlling stockholders on the
account of the minority stockholders (Spong and Sullivan, 2007). Therefore, the
stockholders’ goal and motivation may affect the bank performance. According to the
financial theory, managers who are also major stockholders benefit through stock returns
if they control costs and improve bank performance; but hired managers whose
ownership interest is minimal, if any, may not be rewarded in the same manner for the
same improved performance (Johnson et al., 2008). In order to deal with the
aforementioned principal-agent issue related to hired managers, stockholders and the
board should be very careful in conveying their objectives to these managers. Meanwhile,
these managers’ performance should be put under scrutiny, and superior performance
should be rewarded (i.e., awarding bonuses, stock options, etc., to these managers).
The benefits gained by hired managers differ significantly from the benefits received by
managers who are also major shareholders; the latter benefit from their salaries as well as
from the bank earnings and stock returns. Wealth, or ownership concentration, is another
factor which may affect the active players in a bank and the bank’s governance (Arouri et
al., 2011). Deposit insurance incentives and regulatory discipline are also other factors
that may influence the governance process at banks (Beltratti and Stulz, 2009).
8
Cole and Mehran (1998) find that changes in performance are significantly associated
with changes in insider ownership. They document that the greater the increase in insider
ownership, the greater the performance improvement, which is consistent with the
alignment of interests hypothesis arising from a larger insider ownership. Large
shareholders and institutional investors can be seen as potential controllers of equity
agency problems as their increased shareholdings can give them a stronger incentive to
monitor firm performance and managerial behavior (Demsetz and Lehn, 1985; Shleifer
and Vishny, 1997; La Porta et al., 1998; Denis and McConnell, 2003). This potentially
helps to circumvent the free rider-problem associated with ownership dispersion.
Equity agency costs can be reduced by increasing the level of managers' stock ownership,
which may permit a better alignment of their interests with those of shareholders. In fact,
in the extreme case where the manager's share ownership is 100%, equity agency costs
are reduced to zero (Jensen and Meckling, 1976). As managerial ownership increases,
managers bear a large fraction of the costs of shirking, perquisite consumption and other
value-destroying actions. Further, larger share ownership by managers reduces the
problem of different horizons between shareholders and managers if share prices adjust
rapidly to changes in firm’s intrinsic value. A limitation, however, of this mechanism as a
tool for reducing agency costs is that managers may not be willing to increase their
ownership of the firm because of constraints on their personal wealth.
In accordance with the proposition that larger managerial ownership reduce agency costs,
researchers find that following large management buyouts, firms experience significant
improvements in operating performance. They interpret this evidence as suggesting that
operating changes were due to improved management incentives instead of layoffs or
managerial exploitation of shareholders through inside information. They argue that the
basic issue from an agency perspective is how to avoid such opportunistic behavior.
Previous studies suggest that corporate governance is an effective tool to control the
opportunistic behavior of management (Denis and McConnell, 2003; Chen et al., 2005;
Bhagat and Bolton, 2008; Macus, 2008).
9
Insider ownership can be an effective tool in reducing agency costs although they report a
non- monotonic relation. This functional form has been related to the observation that,
within a certain ownership range, managers may use their equity position to entrench
themselves against any disciplining attempts from other monitoring mechanisms(Morck
et al., 1988; McConnell and Servaes, 1990; Hermalin and Weisbach, 1991). Researchers
such as Spong and Sullivan (2007) reveal that boards of directors are likely to have a
more positive impact on community bank performance when directors have a significant
financial interest in the bank. However, others find no evidence of a positive relationship
between insider ownership and performance (see, for example, Demsetz and Lehn,1985;
Holderness and Sheehan, 1988; Lorder and Sheehan, 1989; Denis and Denis 1994; and
Loderer and Martin, 1997).
A possible explanation for these mixed results is that many of the studies do not properly
distinguish the possibility of alignment of interests across a certain range of ownership
values and of entrenchment over another range. Furthermore, these analyses usually do
not take into account the possibility that several different mechanisms for alignment of
interests can be used simultaneously, with substitution impacts with insider ownership. It
is quite conceivable that different firms may use different mixes of corporate governance
devices (Rediker and Seth, 1995). These different mixes can, however, all be optimal as a
result of varying marginal costs and benefits of the several monitoring instruments
available for each firm. If so, then one would not be able to observe a relationship
between performance and any of these particular mechanisms.
It appears that the main conflict is between owners and managers in common law
countries due to the existence of dispersed control and ownership structures. In civil law
countries, the control and ownership structures are concentrated; thus the main
governance problem arises between minority and controlling shareholders. Therefore,
ownership structure has greater importance in civil law countries where protection of
shareholders right is weak (La Porta et al., 1998; Beck et al. 2003). The situation is more
prevalent in developing countries where large concentration of ownership is more evident
10
while the stock markets are weak. In those countries there is a higher degree of economic
uncertainties coupled with weak legal controls and investor protection, and frequent
government intervention; all resulting in poor performance (Ahunwan, 2002; Rabelo and
Vasconcelos, 2002; Tsamenyi et al., 2007).
Similar results are prevalent in the banking sector in the GCC countries where most
ownership and control in substantial family corporate holdings and boards of directors are
largely dominated by controlling shareholders, their friends and relatives. There are few
independent directors on boards and shareholders dominate the decision-making process
as there is rarely any separation between ownership and management. In most cases the
chairman of the board is also the CEO; and there is a general lack of transparency and
disclosure which leads to the conclusion that a high concentration of corporate ownership
undermines the principles of good corporate governance (Union of Arab Banks, 2003;
Yasin and Shehab, 2004). Based on the above discussion, the first research hypothesis is
as follows:
H1: There is a significant relationship between ownership structure and bank

performance.
2.3 Board Structure
The board of directors is typically the governing body of the organization. Its primary
responsibility is to make sure that the organization achieves the shareholders’ goal.
Therefore, the board is accountable to these shareholders. The board of directors has the
power to hire, terminate, and compensate top management (Johnson et al., 2008). Thus, it
safeguards the organization’s assets and invested capital. In addition to setting the bank’s
objectives (including generating returns to shareholders), the board of directors and
senior management affect how banks run their daily operations, meet the obligation of
accountability to bank’s shareholders, and consider the interests of other recognized
stakeholders (Basel Committee, 2005).
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There is a debate regarding the governing impact of board composition on firm

performance (Dulewicz and Herbert, 2004; De Andres et al., 2005; Ehikioya, 2009;
Mohamed et al., 2013). It is argued that the board composition in terms of the number of
outside directors versus inside directors results in better performance through better
monitoring. This argument is mainly based on the agency theory (Fama, 1980; Demsetz
and Lehn, 1985). Several studies find that the larger the number of outside directors on
the board, the better the firm performance (Weisbach, 1988; Rosenstein and Wyatt, 1990;
Huson, 2001; Mohamed et al., 2013). On the same context, Huang (2010) finds positive
significant correlation between the number of outside directors and bank performance in
Taiwan.
Several other studies reveal negative relationship between the number of outside directors
and firm performance, that a higher percentage of independent directors leads to worse
performance (Agrawal and Knoeber, 1996; Kochar and David, 1996; Yermack 1996,
Bhagat and Black, 2002, Klein 2002). Moreover, several other studies find no significant
correlation between the number of outside directors and corporate performance
(Hermalin and Weibach, 1991; Dalton et al., 1998; Vafeas and Theodorou, 1998; Laing
and Weir, 1999; Lam and Lee, 2012). Further explanation is provided by Adams and
Ferreira (2007) who suggest that CEOs may be reluctant to share information with more
independent boards, thereby decreasing shareholder value.
Pi and Timme (1993) find that banks cost efficiency and return on assets are not
significantly related to the proportion of inside (outside) directors. However, Alonso and
Gonzalez (2006) document a positive relationship between the proportion of non-
executive directors and bank performance in this regard.
Studies also reveal that there is a negative relationship between the size of the board and
firm performance (Hermalin and Weisbach, 1991; Eisenberg et al., 1998; Carline et al.,
2002; Mak and Yuanto, 2003). Larger boards seem to be less efficient due to the slow
pace of decision making and the difficulty in both arranging board meetings and reaching
consensus. It is also argued that the CEO seems to have more dominant power when the
12
board size is too large (Jensen,1993; Yermack, 1996; Eisenberg et al., 1998; Singh and
Davidson, 2003; Cheng, 2008). In addition, Staikouras et al. (2007) report that ROA and
ROE are statistically significant and negatively related to board size in European Banks.
On the other hand, Huang (2010) finds positive significant relationship between the size
of the board and bank performance in Taiwan.
Some researchers argue that based on the stewardship theory, executive directors have a
positive impact on corporate research and development costs as well as better firm
performance based on improved strategic innovation (Donaldson, 1990; Kochar and
David, 1996; Davis et al., 1997). Others, based on the agency theory, argue that
separation of the roles of CEO from chairman is another crucial monitoring mechanism.
CEO duality is problematic from an agency perspective since the CEO seems to get
dominant influence on board decisions by chairing the group of people in charge of
monitoring and evaluating his performance. This results in weakening the board's
independency and may result in an ineffective monitoring of management. Thus, good
governance will occur when the two roles of Chairman and CEO are separated (Baliga
and Rao, 1996; Brickley et al, 1997; Coles and Hesterly, 2000; Weir and Laing, 2001;
William et al., 2003).
In addition, Rechner and Dalton (1989) find no significant differences in firm

performance between separated leadership structure firms and combined leadership
structure firms over a five year period. However, further study of the same sample reveals
that firms with separated leadership structure have higher performance than the firms
with combined leadership structure measured with ROE, ROI, and profit margin
(Rechner and Dalton, 1991).
Saundaramurthy et al. (1997) provide evidence that separating the positions will affect
the shareholder wealth positively. Moreover, Coles and Hesterly (2000) find that firms
that separate CEOs and board chairs will have better stock returns than firms that do not
separate the two roles. On the other hand, Baliga and Rao (1996) do not find sufficient
evidence to support a performance distinction between separated and combined
13
leadership firms when the performance was measured using the market value added
(MVA) and economic value added (EVA) as performance indicators. Pursuant to the
above discussion, the second research hypothesis is:
H2: There is a significant relationship between board structure and bank performance.
2.4 Audit Function
In order to provide reasonable assurance that the bank is accomplishing its objectives as
regards reliable financial reporting, operating efficiency, and compliance with laws and
regulations, the bank should implement a reliable internal control system monitored by
the board of directors, top management, and bank’s audit committee (Arouri et al., 2011).
The main task of this audit committee and internal auditors is testing the design and
implementation of the bank’s internal control system and the fairness and reliability of its
financial statements.
After the U.S. corporate scandals and the collapse of Enron and WorldCom, as well as
Arthur Andersen and others, the internal audit tasks have been changed, especially
pursuant to the issuance of the aforementioned Sarbanes-Oxley Act of 2002. One of the
main responsibilities of the audit committee is to enhance and maintain the internal
auditors’ independence in order to enable them to achieve their duties. The relationship
between the audit committee and internal auditors is important for both parties to fulfill
their job commitments. The internal auditors provide the committee with the necessary
information to which they have direct access, same as the organization’s management, in
order to enable the committee to accomplish its oversight and monitoring mission. On the
other hand, the committee supports the position of the internal audit function and submits
management’s irregularities and other relevant managerial and financial issues to the
board of directors, after discussing such issues with the internal auditors and relevant
other parties (Pathan et al., 2005).
14
In addition to recruiting and terminating the head of the internal audit, the committee is
particularly concerned with the frequency and duration of the meetings with the internal
auditors, as well as ensuring that the internal auditors, especially their head, can
communicate directly with the committee anytime. This committee’s meetings with the
head of the internal audit enhance the independence of the internal audit function,
supporting the parties’ discussion about management’s errors, irregularities, violations,
and fraud.
Whereas the oversight of financial reporting and the monitoring of the internal audit
performance are two of the main activities of the audit committee, it is mandatory that the
committee members, or at least one of them, should have the financial or accounting
expertise in order to understand the technical and control issues related to the internal
audit to enable the committee to review the internal auditors activities and the results they
reach to (Sarbanes-Oxley Act, 2002). Consequently, independence and financial expertise
are very critical for this committee to play its important role and take advantage of the
internal auditors’ performance. Whenever there are problems or obstacles, the committee
performs the necessary investigations using internal feedback, its expertise, and external
consultations if needed. Evaluation of the organization’s internal control structure and
process should also be one of the basic functions of the audit committee and internal
auditors. The committee also evaluates the internal auditors’ effectiveness, their plans
and work arrangements, as well as the resources allocated to them. Additionally, the
internal auditors should be involved in issues related to the organization’s joint ventures,
environmental matters, and international operations. As a corporate governance reform,
the above-mentioned Act increased the audit committee’s and internal auditor’s
independence from management.
Audit committees are identified as effective means for corporate governance that reduce
the potential for fraudulent financial reporting (NCFFR, 1987). Audit committees oversee
the organization’s management, internal and external auditors to protect and preserve the
shareholders’ equity and interests. To ensure effective corporate governance, the audit
15
committee report should be included annually in the organization’s proxy statement,

stating whether the audit committee has reviewed and discussed the financial statements
with the management and the internal auditors. As a corporate governance monitor, the
audit committee should provide the public with correct, accurate, complete, and reliable
information, and it should not leave a gap for predictions or uninformed expectations
(BRC, 1999). The BRC report provides recommendations and guiding principles for
improving the performance of audit committees that should ultimately result in better
corporate governance. The importance of the audit function in terms of the audit
committee and audit firm is further strengthened by the Sarbanes-Oxley Act of 2002. In
light of the aforementioned, the third research hypothesis is:
H3: There is a significant relationship between audit function and bank performance.
2.5 International Corporate Governance Regulations
In addition to each country’s national accounting and auditing standards and principles,
there are international standards and principles that may be applied in many countries as
follows: 1- The U.S. GAAP and European IFRS which allow managers various methods
to choose from regarding their recognition of financial reporting elements. However, in
order to make their bank performance look better than what it really is, the managers may
abuse such choice advantage and thereby increase the information risk for users through
falsification of values, concealing fraud, or hiding important information that should be
disclosed; and 2- The Basel Accords (Agreements) issued by the Basel Committee on
Banking Supervision (BCBS) which does not enforce its recommendations although most
countries implement them. Three Accords have been published by the BCBS so far, as
follows: Basel I of 1988 regarding the minimum capital requirements for banks; Basel II
of 2004 and its updates during 2005-2009 with respect to capital requirements,
supervisory review, and market discipline; and Basel III which is agreed upon by the
BCBS in 2010-2011 as regards capital adequacy, stress testing, and market liquidity risk.
16
2.6 Interested stakeholders
Corporate governance parties include internal parties, such as the organization’s

shareholders, internal auditors, audit committee, board of directors, CEOs, CFOs, and
other executives and managers; and include external parties, such as customers, suppliers,
external auditors, stock exchanges, and government authorities. Other parties who have a
stake in the organization may also include the organization’s employees, creditors, and
the community at large. The governance chain depends on the size of the organization. In
a small family business, it is very simple, consisting of shareholders, board of directors,
and managers; some of whom may be family members. In large publicly-held
organizations, the chain may include managers, senior executives, executive directors,
board, investment managers, trustee of funds, and beneficiaries (Johnson et al., 2008).
3 Research Methodology
3.1 The Method
In order to test the hypotheses, quantitative method is used to investigate the impacts of
corporate governance mechanisms on bank performance. CG mechanisms include
(ownership structure, board structure, audit function), and other control variables, such as
bank size, age and type of banks. The bank performance is measured by ROE, ROA, and
Profit Margin. Bankscope database is used to select the country, Yemen and the six GCC
countries from which the top fifty banks were selected as shown in Table (1). In addition
to the Bankscope database, the respective banks’ websites and other related websites
were used to extract the needed financial and non-financial information about each bank
from its published audited financial statements, annual reports, and other relevant
information.
17
3.2 Sampling and Data Collection
The sample includes conventional and Islamic banks operating in Yemen and the six
GCC countries using the data for the year 2011. Excluded from the sample are banks that
do not have audited financial statements. Financing, insurance, or non-bank institutions
are also excluded since they are different from banks with respect to their specific
characteristics, management structures, accounting procedures, and audit functions. Table
(1) below shows the population and samples per country, and Table (2) summarizes the
sample selection.
The final sample consists of the largest fifty conventional and Islamic banks operating in
these seven countries. The process of selecting this sample is based on the values of these
banks’ total assets and the consequent ranking stated by Bankscope database. Any bank
that was excluded due to any of the above reasons was replaced with the next immediate
bank in ranking. Table (2) summarizes the sample selection.
3.3 Measurement of Variables
For bank performance measurement, the dependent variables used are ROE, ROA, and
Profit Margin. In the meantime, the independent variables used as regards corporate
governance are classified into three categories: ownership structure, board structure, and
audit function. Other control variables include bank type, age, and size. Table (3) reveals
the definition and measurement of these variables.
4 Data Analysis and Discussion
4.1 Descriptive Analysis
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Table (4) illustrates the minimum and maximum values of the variables. The descriptive
findings reveal the central tendency and dispersion of the indicators shown in Table (4),
as follows: Bank Age is shown with a mean of 29.74 years and a median of 30.5 years
which indicates that the banks in the region have an average of 30 years of experience,
which ranges from 4 to 75 years. Bank Size with an average of 92% (close to 1 unit)
indicates that most of the respective banks have large amount of total assets (exceeding
US$1 billion). Ownership concentration’s average exceeds 62% which means that most
of the bank shares are owned by block holders, which also have a significant impact on
bank performance. Board committees also with on average of 92% indicates that most of
the relevant banks have committees facilitating and assisting the banks’ boards of
directors in performing their tasks. Meanwhile, Board independence’s average which
exceeds 62% indicates that most of the respective banks’ boards are independent (consist
mostly of non-executive members). Board meetings indicate that the banks’ boards met
approximately 5 times during 2011, with an average of 4.94, which is a good indication
about the monitoring and supervising of the banks’ operations by the board of directors.
The Profit margin is shown as a high average of 37.62%, but with a negative profit
margin of -37% as a minimum. The table also shows a higher ROA with an average of
1.65 times, but with a negative return of -90% as a minimum. Likewise, ROE is shown as
the highest return with an average of 10.29 times, but also with a negative return of -7.65
times. Table (5) shows the frequency of the banks based on the GCC countries and
Yemen. Figure (1) shows the distribution of the sample based on the number of banks
operating in the aforementioned countries.
4.2 Correlation between Variables
For correlation between independent corporate governance variables among themselves,

and between these independent variables and bank profitability dependent variables, the
Correlation Matrix shown below as Table (6) is briefed as follows: The profitability
measures, ROE and Profit Margin are positively and significantly correlated with Bank
19
Age at the 5% level (2-tailed). ROA shows a significant negative correlation with Board
Independence at the 1% level and with Bank Size at the 5% level (both 2-tailed). Profit
Margin also shows a significant negative correlation with Ownership Concentration at the
1% level, and positive significant correlation with Board Committees at the 5% level
(both 2-tailed). ROE and Profit Margin also show a significant negative correlation with
Board Independence at the 5% and 1% levels respectively (both 2-tailed). Profit Margin
is also positively and significantly correlated with Audit Committee at the 5% level (2-
tailed). Moreover, there are significant correlations among the dependent variables and
also among the independent variables at the 1% and 5% levels, such as between ROE,
ROA, and Profit Margin; as well as between Bank Size and Board Committees, between
Foreign Shareholders and External Auditors, and between Ownership Concentration and
Board Independence (all at the 1% level).
4.3 Hypotheses Testing
In order to test the above hypotheses, three equations are used, and presented in the
following formulas 1, 2, and 3. These hypotheses are concerned with investigating the
impact of bank size, bank age, and the above corporate governance variables on bank
performance by using OLS regression analysis as shown on table (7).
ROE = α + β1 OWN.CONC +β2 FOREIGN + β3 ALIGN.IN + β4 DUALITY

+ β5 BRD.COMT + β6 EXT.AUDT + β7 BRD.MBRS + β8 BRD.NONX
+ β9 BRD.INDP + β10 BRD.MTNG + β11 CG.REPRT +β12 REM.COMT
+ β13 NOM.COMT + β14 AUD.COMT + β15 BNK.SIZE + β16 Age + ε (1)
ROA = α + β1 OWN.CONC +β2 FOREIGN + β3 ALIGN.IN + β4 DUALITY

PROFT.M = α + β1 OWN.CONC +β2 FOREIGN + β3 ALIGN.IN + β4 DUALITY

20
Model 1 investigates the relationships between bank financial performance measure

(ROE) and the above corporate governance variables, as well as bank age and bank size.
The R2 is 0.214 and the model appears highly significant (F-value = 6.264, p-value =
0.004). Regarding my variables of interest, it is concluded that Bank Age and Number of
Board Meetings have an impact on ROE, where the estimated coefficients are positive
and statistically significant at 1% and 5% levels respectively. This result regarding bank
age is consistent with the results of the studies of (Stathopoulos et al., 2004;
Athanasoglou et al., 2005). Bank age has a positive and significant impact on ROE due to
the learning curve principle which makes a bank learn from its previous good and bad
experience for correction, improvement and more development, as long as other
corporate governance predictors remain constant. Apparently older banks operating in the
peninsula have higher ROE than younger banks due to the interaction between the bank
age and the market share, as well as the longer tradition and good reputation that could
have been built by the passage of time. Therefore, bank age contributed significantly to
the performance measures of ROE. Since they focus on increasing their market share
rather than on improving profitability, newly established banks in the region are not that
profitable in their first years of operations.
The number of board meetings has an impact on ROE, where the estimated coefficient is
also positive and statistically significant at 5% level. This result is consistent with the
result of the studies conducted by (Davidson et al., 1998; Godard and Shatt, 2004;
Bouaziz and Triki, 2012). It seems that the frequency of board meetings for banks
operating in the region varies. The increase in the number of board meetings per year
means an increase in monitoring, follow-up, supervision, direction, and attentiveness by
the board of directors which leads to facilitating the bank’s operations and assisting
management in achieving the bank’s objectives through making the right decision on the
right time, taking advantage of the available opportunities and avoiding the potential
threats. The frequency of board meetings helps the board members know the senior
21
management team and to understand the bank’s operations in order to perform the board
tasks appropriately. Therefore, it is concluded that banks operating in the region whose
board meetings are more frequent have higher ROE than the other banks.
Model 2 examines the relationships between bank financial performance (ROA) and the
aforementioned variables of interest. The R2 is 0.277 and the model appears highly
significant (F-value = 8.801, p-value = 0.001). As regards my variables of interest, it is
concluded that Board Independence and Bank Size appear to have an impact on ROA,
where the estimated coefficients are negative and statistically significant at 1% and 5%
levels respectively. This result regarding board independence is consistent with the
results of other studies of (Baysinger and Butler, 1985; Vancil, 1987; Weisbach, 1988;
Klein, 1998; Hall and Liebman, 1998; Bhagat et al., 1999; Bhagat and Black, 2000).
Board independence means that the majority of the board members are non-executive
members indicating that the board is exercising its powers of directing, controlling, and
monitoring independent from the executive management. However, this study shows that
board independence has a significant and negative impact on the bank’s ROA; that is,
banks operating in the peninsula with more non-executive board members have lower
ROA. Although board independence is traditionally supported for its unbiased
monitoring which may lead to improved performance, the study reveals that the boards of
the banks need to have reasonable number of executive managers (insiders) who bring
different knowledge and skills to the boards. These insiders may improve the board’s
decisions with respect to investment, strategic planning, and other relevant decisions.
Insiders have both knowledge and incentives to do a better job; they are well-informed
about their banks, and they have their human capital as well as their financial capital
(especially if they are owner managers) committed to their banks.
Bank size has an impact on ROA, where the estimated coefficient is also negative and
statistically significant at 5% level. This result is consistent with the results of studies
conducted by (Berger et al., 1987; Boyd and Runkle, 1998; Miller and Noulas, 1997;
Eichengreen and Gibson, 2001; Pasiouras and Kosmidou, 2007; Kosmidou, 2008;
22
Athanasoglou et al., 2008). In a well-organized bank, the bank size (i.e., with larger
amount of total assets) offers great help to the bank’s mobility taking advantage of its
financial strength pursuing available business opportunities effectively, avoiding
potential threats, and overcoming its weaknesses. Through their created economies of
scale, larger banks lower their average costs which affects their banks’ profitability
positively and enables them to exercise market power through stronger brand image or
implicit regulatory (too big to fail) protection. However, the positive impact of a growing
bank’s size on its profitability turns to be negative after a certain limit due to bureaucratic
problems and poor expenses management. In addition to this cost issue, bank size also
controls for product and risk diversification which leads to a negative relationship and
impact between bank size and ROA since increased diversification leads to higher credit
risk and consequently to lower returns. Meanwhile, the above-mentioned larger amount
of total assets reduces the ROA ratio to a great extent which leads to the aforementioned
negative correlation and impact between bank size and the outcome ROA. This study
reveals this negative impact by bank size on profitability, measured by ROA as the bigger
the size of a bank operating in the region, the lower its ROA.
Model 3 examines the relationships between bank financial performance measure (Profit
Margin) and the above variables of interest including bank size and bank age. The R2 is
0.326 and the model appears extremely significant (F-value = 7.425, p–value = 0.000).
Regarding my variables of interest, it is concluded that Ownership Concentration, Bank
Age, and Board Committees appear to have an impact on Profit Margin, where the
estimated coefficients regarding bank age and board committees are positive and
statistically significant at 1% and 5% levels respectively, while ownership
concentration’s estimated coefficient is negative and statistically significant at 5% level.
The positive result regarding bank age conforms to the results of studies conducted by
(Stathopoulos et al., 2004; Athanasoglou et al., 2005). As regards board committees, this
study’s positive result corroborates the results of the studies of (Pincus et al., 1989;
Anderson et al., 2004; Barth et al., 2004). Meanwhile, the negative result regarding
23
ownership concentration is consistent with the results of studies conducted by (Jensen

and Meckling, 1976; Shleifer and Vishny, 1997; Karaca and Eksi, 2012).
Ownership concentration has a significant impact on profit margin. This impact could be
positive, helping the bank’s decision-making, reducing agency costs, and leading to
higher profit rates, better performance, and better profit margin (Claessens et al., 1997;
Fuentes and Vergara, 2003). However, this study indicates the opposite regarding the
banks operating in the region. It indicates that the bank which has ownership
concentration has a significant and negative impact on profit margin apparently allowing
the bank’s controlling shareholders to expropriate the bank’s resources for their own
private benefits by different ways, such as through related-party transactions (which leads
to a negative impact on the growth rate of the bank’s net assets), or through transferring
the resources from one entity in which the controlling shareholders own less to other
entities in which they own more. This negative impact leads to lower profit rates and
lower profit margin. This result is consistent with the results of the studies conducted by
(Jensen and Meckling, 1976; Shleifer and Vishny, 1997; Karaca and Eksi, 2012).
Similar to its aforementioned impact on ROE, bank age also has a significant and positive
impact on profit margin due to the above-mentioned learning curve principle. This result
conforms to the results of the studies of (Stathopoulos et al., 2004; Athanasoglou et al.,
2005). It seems that banks, operating in the peninsula, which enjoy good reputation for
longer time gain better market share and better competitive edge, and hence achieve
higher profit margin.
Board committees which include Audit, Remuneration/Compensation, and Nomination

Committees also have a significant and positive impact on profit margin. Apparently, the
peninsula banks which have such committees make higher profit margin than the others.
This study’s positive result corroborates the results of the studies of (Pincus et al., 1989;
Anderson et al., 2004; Barth et al., 2004). These committees control the bank
management’s opportunistic behavior, monitor closely the bank activities, and reduce the
bank’s risk-taking appetite. They facilitate the board functions and responsibilities, and
24
hence the board effectiveness. The committees oversee the bank’s operations, focusing
on the bank’s compliance to rules and regulations, and addressing any financial errors,
misstatements, or irregularities. The audit committee helps the board of directors in
auditing, monitoring, supervising, and controlling the financial and managerial issues of
the bank, as well as facilitating the board’s relationship with internal and external
auditors. It also monitors, verifies, and safeguards the integrity and credibility of the
process of accounting, auditing, and financial reporting; enhances transparency for bank’s
stockholders and creditors; and resolves disagreements between management and
external and internal auditors. It also ensures that the bank has an effective internal
control and reliable financial reporting system, and that it complies with the regulatory
requirements and the bank’s code of conduct. The remuneration/compensation committee
recommends and monitors the level and structure of remuneration for bank’s
management and compensation to the board members properly for their ordinary and
extra-ordinary efforts. The nomination committee recommends the right people to the
board and to the bank’s shareholders.
5. Summary and Conclusion
This study examines the impact of internal corporate governance mechanisms on bank
performance in the Arabian Peninsula countries. It provides an insight into the corporate
governance practices in fifty traditional and Islamic banks operating in Yemen and the
six GCC countries, and the impact of such practices on ROE, ROA and Profit Margin.
Corporate governance of banks in emerging economies is extremely important as banks
hold critically dominant position in the financial systems of these countries. Meanwhile,
banks are very important engines of growth in such economies as they are typically the
most important source of finance for the majority of firms, in addition to playing a
substantial role in the payment and saving system. Hence, bank governance is extremely
25
important since the reduced role of economic regulation has resulted in giving bank
managers greater freedom on how they run their banks.
Such emerging economies are likely to require stronger and more effective governance
system than their western developed counterparts if they are to become active, equal, and
full participants in the global financial market. The governments of most of the studied
countries have taken the necessary steps to have a sound financial sector based on well-
established financial organizations in order to keep pace with international developments
and activate the vision of a solid economy that would be recognized globally. Although
the corporate governance rules and regulations in the studied countries might not be as
elaborate as corporate governance regimes in western countries, it is fair to say that they
provide adequate coverage of the key disclosure issues of relevance in a market with a
nascent disclosure culture. With that being said, it is worth-mentioning that policy makers
in the subject countries need to ensure that firms implement effective corporate
governance mechanisms. This implementation should be appropriate for the business
environment in these countries while embracing international corporate governance
standards.
The study results reveal that certain market value performance is affected by corporate
governance mechanisms. In the meantime, it is fair to say that corporate governance
mechanisms have an impact on book value performance. The results are consistent with
previous literature that the relationship between corporate governance and performance is
still not clearly established and that financial effect of corporate governance on firm
performance in emerging economies is still relatively scarce. Future researches could
provide additional views about this relationship between bank performance and internal
corporate governance; as well as the relationship between bank performance and external
corporate governance, such as government regulations.
26
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Appendix
Table 1 – Population and samples per country
Country Population* Sample Size Sample Size (%)

(Banks only)
Bahrain 29 14 48%
Kuwait 10 7 70%
Oman 7 7 100%
Qatar 7 7 100%
Saudi Arabia 12 9 75%
United Arab Emirates 19 7 37%
Yemen 11 8 73%
Total 95 59 62%
*Information from Bankscope Database
Table 2 - Sample selection
Number of banks selected from Bankscope Database based on its 59

ranking for 2011 and the number of banks in each country
No annual reports available for 2011 (3)
No sufficient data about bank (6)
Final sample 50
Final Sample (%) 53%
37
Table 3 - Definition and measurement of variables
Variable Symbol Definition Measurement
Dependent Variables
ROE The amount of return Net Income / Total Equity

on bank’s equity
ROA The amount of return Net Income / Total Assets

on bank’s assets
PROFT.M Profit Margin Net Income / Revenues
Independent Variables
OWN.CONC Ownership Adding up all shareholdings of 5% or more

Concentration (excluding others)
INSTITUT Institutional If there is/are institutions holding bank shares

Ownership (i.e., Institutional) = 1; otherwise = 0
FOREIGN Foreign Ownership If there is/are Foreign ownerships = 1;

otherwise = 0
ALIGN.IN Alignment of Interests Owner Manager = 1; Hired Manager = 0
BRD.SIZE Board Size Total number of board members during 2011
BRD.INDP Board Independence Number of non-executive members on the

board / Total number of board members
DUALITY CEO Duality If the CEO and Chairman are the same person
= 0; otherwise = 1
BRD.COMT Board Committees If there is a Board Committee (Audit,

Compensation, etc.) = 1; otherwise = 0
EXT.AUDT External Audit Type If the external auditor is one of the Big 4 CPA
Firms = 1; otherwise = 0
BRD.MBRS Number of Board Total number of board members during 2011

Members
38
BRD.NONX Number of Non- Number of non-executive members on the

Executives on Board board during 2011
BRD.MTNG Board Meetings Number of board meetings held during 2011
CG.RPRT Corporate Governance If Corporate Governance Report exists = 1;

Report otherwise = 0
REM.COMT Remuneration If Remuneration/Compensation Committee

/Compensation exists = 1; otherwise = 0
Committee
NOM.COMT Nomination If Nomination Committee exists = 1; otherwise

Committee =0
AUD.COMT Audit Committee If Audit Committee exists = 1; otherwise = 0
AUD.MBRS Number of Audit Number of Audit Committee members during

Committee Members 2011
AUD.NONX Number of Audit Number of non-executive members in the

Committee Non- Audit Committee during 2011
Executive Members
AUD.MTNG Audit Committee Number of audit committee meetings during

Meetings 2011
Control Variables
TYPE Bank Type Conventional bank = 1; Islamic = 0
AGE Age of Bank In years: 10 or more = 1; less than 10 = 0
BNK.SIZE Bank Size Natural log of total assets
39
Table 4 – Descriptive statistics
Variable Mean Std. Deviation Minimum Maximum

ROE 10.286 6.065221365 -7.65 22.48
ROA 1.6474 1.06112149 -0.9 4.91
PROFT.M 0.3762 0.219562552 -0.37 0.75
TYPE 0.78 0.46467017 0 2
AGE 29.74 15.44814895 4 75
BNK.SIZE 0.92 0.274047516 0 1
OWN.CONC 0.6233906 0.28482618 0.05 1
FOREIGN 0.6 0.494871659 0 1
ALIGN.IN 0.16 0.37032804 0 1
DUALITY 0.08 0.274047516 0 1
BRD.COMT 0.92 0.274047516 0 1
EXT.AUDT 0.9 0.303045763 0 1
BRD.MBRS 9.48 2.224538475 6 19
BRD. NONX 8.46 2.042507463 4 13
BRD.INDP 0.6233906 0.28482618 0.05 1
BRD.MTNG 4.94 1.633951015 0 9
CG.RPRT 0.86 0.350509833 0 1
REM.COMT 0.74 0.443087498 0 1
NOM.COMT 0.59183673 0.496586991 0 1
AUD.COMT 0.86 0.350509833 0 1
AUD. MBRS 3.02 1.477587664 0 6
AUD.NONX 2.78 1.374550019 0 5
40
Table 5 - Frequency of the sample
Country Frequency Percent Cumulative

Percent
Bahrain 14 28.0 28.0
Kuwait 4 8.0 36.0
Oman 7 14.0 50.0
Qatar 6 12.0 62.0
KSA 9 18.0 80.0
UAE 7 14.0 94.0
Yemen 3 6.0 100.0
Total 50 100.0
Figure 1. Distribution of the sample
Country
Bahrin
kuwit
oman
Qatar
KSA
UAE
Yemen
41
Table 6 – Pearson correlation matrix

ROE ROA PROFT. TYPE AGE BNK.SIZE OWN. FOREIG ALIGN. DUALITY BRD. EXT. BRD. BRD. BRD. BRD. CG. REM.C NOMC AUD.
M CONC N IN COMT AUDT MBRS NONX INDP MTNG REPRT OMT OMT COM
T
1
ROE
1
ROA .674**
1
PROFT.M .804** .611**
0.196 -0.024 0.198 1

TYPE
0.123 0.168 1
AGE .361* .324*
-0.205 0.066 0.019 0.024 1

BNK.SIZE -.286*
0.185 -0.070 0.059 1

OWN.CONC -.286* -.453** -.369**
-0.102 0.015 -0.005 -0.035 -0.131 0.060 0.022 1

FOREIGN
-0.150 -0.007 -0.090 -0.147 -0.032 -0.072 0.097 0.245 1

ALIGN.IN
-0.087 0.184 0.026 -0.019 0.034 -0.185 0.057 0.241 1

DUALITY .676**
0.082 0.165 0.179 -0.106 -0.242 0.129 0.087 1

BRD.COMT .358* .457** .361**
0.107 0.131 * -0.014 -0.010 ** -0.230 ** 0.145 0.098 1
EXT.AUDT .332 .393 .408 .639**
-0.029 0.141 -0.053 -0.271 0.024 -0.070 -0.013 0.252 -0.003 0.103 1
BRD.MBRS .376** .538**
0.178 0.096 -0.235 0.139 -0.188 -0.273 0.105 0.251 -0.042 0.010 1
BRD. NONX .313* .370** .692**
0.185 -0.070 0.059 0.022 0.097 0.057 -0.242 -0.230 -0.013 -0.273 1
BRD.INDP -.286* -.453** -.369** 0.629**
0.158 0.045 0.191 0.117 -0.244 0.080 -0.020 0.020 -0.085 0.011 0.070 0.081 0.119 -0.020 1
BRD.MTNG .354*
0.022 0.070 0.160 -0.068 -0.116 -0.037 0.019 -0.093 0.166 0.092 -0.037 0.270 1
CG.REPRT .306* .376** .518** .634**
0.068 0.065 0.080 0.113 -0.225 0.161 0.100 0.010 0.007 0.191 0.090 0.100 1
REM.COMT .540** .497** .562** .457** .681**
0.016 -0.167 0.014 -0.096 0.254 -0.083 -0.207 -0.049 -0.073 0.254 1
NOM.COMT .314* .359* .409** .359* .406** .311* .492** .724**
0.014 0.193 0.058 -0.203 -0.196 0.176 0.119 -0.069 -0.108 -0.196 1
AUD.COMT .298* .306* .376** .731** .634** .413** .502** .549** .373**
**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
42
Table 7 - OLS Regression Results

Dependent Variables
(1) (2) (3)
ROE ROA Profit Margin
Constant -0.190 6.733 0.822

TYPE 0.493 0.549 1.161
AGE 3.272 0.685 2.783
BNK.SIZE -2.003 -2.044 -0.727
OWN.CONC -1.854 . -2.117
FOREIGN -0.665 0.394 -0.654
ALIGN.IN -1.285 0.097 -0.805
DUALITY -1.501 1.301 0.003
BRD.COMT 0.096 1.712 2.621
EXT.AUDT 0.575 1.209 0.680
BRD.MBRS -0.963 0.957 -0.522
BRD. NONX 0.171 1.200 -0.082
BRD.INDP -1.854 -3.529 .
BRD.MTNG 2.156 0.396 1.395
CG.RPRT -0.183 1.159 .
REM.COMT 0.067 1.300 .
NOM.COMT -0.440 0.329 .
AUD.COMT -0.290 1.663 .
R2 0.214 0.277 0.326
Adjusted R2 0.180 0.245 0.282
F-statistics 6.264 8.801 7.425
p-value for F- test 0.004 0.001 0.000
Observations 50 50 50
43
Table 8 - List of Banks
Bahrain Kuwait Oman Qatar Saudi UAE YEMEN

Arabia
1 Ahli National Bank Qatar National Emirates Tadhamon

United Bank of Muscat National Commercial NBD PJSC Internation
Bank BSC Kuwait SAOG Bank Bank (The) al Islamic
S.A.K. Bank
2 Albaraka Al Ahli National Commercial Al Rajhi Natiional Yemen
Banking Bank of Bank of Bank of Qatar Banking & Bank of Abu Bank for
Group Kuwait Oman (The) QSC Investment Dhabi Reconstruc
B.S.C. (KSC) (SAOG) Corporation tion and
-Al Rajhi Developme
Bank nt
3 Gulf Jordan Bank International Riyad Bank Abu Dhabi National
Internation Kuwait Dhofar Bank of Qatar Commercial Bank of
al Bank Bank SAOG Q.S.C. Bank Yemen
BSC
4 BBK Industrial Bank Qatar Banque First Gulf
B.S.C. Bank of Sohar International Saudi Fransi Bank
Kuwait SAOG Islamic Bank
K.S.C.
5 Ithmaar HSBC Qatar Saudi British Dubai
Bank Bank Development Bank (The) Islamic Bank
B.S.C. Oman Bank plc
Q.S.C.C.
6 National Oman Qatar First Arab Union
Bank of Arab Investment National National
Bahrain Bank Bank Bank Bank
SAOG
7 Al-Baraka Ahli Islamic Mashreqbank

Islamic Development
Bank
Bank Bank
SAOG
8 Arcapita Saudi
Bank Hollandi
Bank
9 Al-Salam Bank Al-

Bank Jazira
Bahrain
44
10 Investcorp
. Bank
11 Bahrain
Islamic
Bank
12 United
Gulf Bank
13 BMI Bank
14 Future
Bank
45
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Impact of Corporate Governance on Banks: Evidence from Yemen and GCC

Research · March 2018

PhD Thesis View project

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Impact of Corporate Governance on Banks: Evidence from Yemen and

Dr. Ahmed M. Al-Baidhani

Keywords: corporate governance, bank performance, board structure, ownership

Corporate governance is a system used to direct and control an organization. It includes

A corporate governance system refers to a country-specific framework of legal, cultural,

Since it is viewed as a necessary element of market discipline, strong corporate

2 Background and Hypotheses Development

There is a consensus on the classification of corporate governance mechanisms to two

Similarly, Farinha (2003) surveys two categories of governance (or disciplining)

Considerable research findings on corporate governance and firm performance in non-

Abu-Tapanjeh (2009) compares the Organization of Economic Co-operation and

2.2 Ownership Structure

H1: There is a significant relationship between ownership structure and bank

2.3 Board Structure

There is a debate regarding the governing impact of board composition on firm

In addition, Rechner and Dalton (1989) find no significant differences in firm

2.4 Audit Function

committee report should be included annually in the organization’s proxy statement,

2.5 International Corporate Governance Regulations

2.6 Interested stakeholders

Corporate governance parties include internal parties, such as the organization’s

3.1 The Method

3.2 Sampling and Data Collection

3.3 Measurement of Variables

4 Data Analysis and Discussion

4.1 Descriptive Analysis

4.2 Correlation between Variables

For correlation between independent corporate governance variables among themselves,

4.3 Hypotheses Testing

ROE = α + β1 OWN.CONC +β2 FOREIGN + β3 ALIGN.IN + β4 DUALITY

ROA = α + β1 OWN.CONC +β2 FOREIGN + β3 ALIGN.IN + β4 DUALITY

PROFT.M = α + β1 OWN.CONC +β2 FOREIGN + β3 ALIGN.IN + β4 DUALITY

+ β13 NOM.COMT + β14 AUD.COMT + β15 BNK.SIZE + β16 Age + ε (3)

Model 1 investigates the relationships between bank financial performance measure

ownership concentration is consistent with the results of studies conducted by (Jensen

Board committees which include Audit, Remuneration/Compensation, and Nomination

5. Summary and Conclusion

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