ABSTRACT

The main purpose of this study is to examine the relationship of corporate governance and performance
of baking sector in Pakistan there are three variables identified which affect the performance of the bank
they are composition of board, audit committee and size of board. Quantitative research has been
conducted in which five banks of same nature are selected total population is of five people, after
collecting the data the result is find through SPSS tool which show that there is a positive relationship
between corporate governance and its impact performance of company and the study also indicate that
the three variables composition of board, audit committee and size of board create a great impact on the
performance of a company
INTRODUCTION

Background

Corporate governance refers to standards, procedures and relations through which corporation are
managed or in simple words we can say that these are the practices which are followed by
corporation to manage their operations. Corporate governance is well researched topic in all over
the world whether it is developed part of the economy or undeveloped economy. From last 20 to
25 Years, different standards and principles related to corporate governance are developed and are
being followed in various countries bases on the reports by Cadbury Committee (1995) provides
the theme of the Corporate Governance.

Effective Corporate governance enable country’s economy to grow, also improve the business
operations and its performance and helps to maintain good relationship with stakeholders in the
market. It is a system which defines the ownership of the firm and states the distribution of returns
to shareholders of the company. If there is any change in country’s system of corporate governance
like change in system of employment, trade policy, relation with other countries it will directly
affect organizational performance in that country (Higgs, 2003)

Many firms fail due to their poor and inefficient corporate governance, companies with enrich and
efficient corporate governance practices always have better performance and high profitability.
Now a days every company focus on its corporate governance practices which includes
transparency, (Turnbull Committee, 2003) discloser of its financial reports, independent board
size, formation, committees and many other corporate governance practices. Companies adopt
different governance structures, to manage their business operations properly and to influence
managers to protect the rights of shareholders.

The authors (Mulili & Wong, 2010). In his study found that, countries use different type of
governance framework, like civil law followed by Italy, Austria, France, Germany it is said to be
as a developed structure it considered the satisfaction of shareholders. On the other hand, countries
like UK, Canada, Australia, New Zealand, USA follow common traditional law.
Many countries in the world form their own code of corporate governance when it is in trend in
2002. The main concern of this code is code is to provide guideline to the companies about
management and the distribution of wealth among shareholders and to protect their rights. In
Pakistan Security and Exchange Commission of Pakistan (SECP) issue code of corporate
governance which deals with to implement good governance and to enhance board of director
structure because they have obligation to disclose the financial statement and they are answerable
to shareholders of firm about everything operation in company (Hampel Committee, 1992),.

There are many examples under which, economies whether they are developed or under developed
failed badly due to their bad corporate governance practices and procedures like east Asia crises
of 1998, WorldCom 2002, and financial crises of 2008 which is ultimately the eye opener for
financial institutes to pat attention toward corporate governance practices which minimize or
mitigate risk. Corporate governance minimizes the unsystematic risk of company which is related
to its management and internal loophole or related to the business operations it also mitigates the
risk related to financial reports when central bank influence you to follow best corporate
governance practices (Greenbury Committee, 1998).

With respect to Pakistan many companies failed because of poor corporate governance practices
one of the major victim was PTCL which totally collapse and privatized by government Mehran
Bank, Crescent Bank, Silk Bank are also the victim of poor corporate governance.

Problem Statement

The economy of Pakistan is vastly depending upon the different sector of corporations. Many
corporation was badly failed (PTCL, crescent Back, Mehran Bank) due to poor corporate
governance practices, Crescent Bank was involved in unethical practices, Misrepresentations of
accounts, misguide their investors. Company should be real in term of ethics and follow ethical
principles strongly and to minimize their risk company should not influence its board of directors
and make them able to take decision without any pressure.
Objective of Study

What is the impact of Corporate Governance on performance of banking sector in Pakistan?

What is the relationship between corporate governance practices and performance of banking
sector in Pakistan?

Significance of Study

Corporate governance is an extensive topic, and very limited research has been conducted about
Pakistani firms the collapse of PTCL on of the biggest disaster of Pakistan history in most of
government organizations more poor corporate governance are being followed due to which it
faces overall decline its value, less attention is paid to corporate governance, on the other hand
private firms are paying more attention toward corporate governance. So, it is very vital to analyze
overall impact of Corporate governance on firm’s value. Banking sector is rapidly growing in
Pakistan and its performance is improving to with the passage of time, but still banks are not
following those practices which are corporate governance practices which increases the profit of
company and performance of the company. There many examples of banks who were started with
remarkable performance but with time their management support declines and they suffer badly in
the end the reason behind their shutdown is bad practices and unprofessional approach toward
corporate governance. As the sector of banking and its size is increasing but there are some failed
examples of banks as well so this study is to identify the relationship between corporate
governance and its impact on banking sector in paksitan.
LITERATURE REVIEW

This is s second chapter of study which explain about the empirical studies performed by different
researcher, corporate governance play an important role to boost up the performance of firm and
the ultimate purpose of the company is to increase the shareholder’s wealth and corporate
governance help company to protect the right of shareholder by protecting there right it will
increase the demand of the share of that company which boost its value and dividend with time.
This study is typically focus on banking sector of Pakistan and its performance and relationship
with corporate governance practices.

Relationship between corporate Governance and Firm performance

Every organization have its own goals and those goals are totally depending upon the performance
of firm, performance of firm also create positive impact on shareholders and ultimately it increases
the capital of company (kajola, 2012). There is a positive relationship between corporate
governance and invest, investors are more attracted toward those companies who follow good
practices of corporate governance (Notbrook, 2006). If company follow good practices it will
minimize the risk of the company and its also minimize unsystematic risk of the company (IFC,
2004). A researcher (Enobakhane, 2006) says that corporate governance strengthens the
relationship with stakeholders, improve the sustainable environment and contribute in corporate
social responsibility. The performance of company who follow good practices of corporate
governance performed for longer period and whenever they need capital it is available for them
(Colabrese et al, 2013)

Board Size

According to the authors (Hermalin & Weisbach, 2003) in their study says that, small board size
is more appropriate and successful than large board size because large board size have large
amount of people, there is more chances of difference of opinion due to this conflicts may occur,
but another researcher (Dalton, 2005) criticized on small boards in his study, he find that due to
small number of people there will be lack of diversity of knowledge, large board have large number
of people so that they have more knowledge share in between them, they have more skills and
expertise’s as compared to small boards. Another author (Mak & Yuanto, 2003) in his study
specify that the performance of Malaysian and Singapore companies is higher because of its small
board size which composed of five board members only (Adam & Mehran, 2005) in their study
indicate positive relationship between firm performance and large board size is depend on type of
industry, some sectors have positive relationship between firm performance and large board size.
On the other hand, (Bhagat & Black, 2001) state that there is no relationship between performance
of company and its board size. Some of researcher find out that there is negative relationship
between firm performance and large board size and overall performance of company will be
decline due to large board size they are (Chan & Li, 2008), (Mustafa, 2006), (De Andres et al,
2005).

Board Composition

Number of studies specify that composition of board directly affect the overall performance of the
firm. Usually board composition is consisting of executive and non-executive directors, directors
who are depended on others are known as executive directors and in depended directors are known
as non-executive directors (Shah et al, 2011). A researcher (Stai Kouras el al, 2007) says in his
study there is no relationship between firm performance and board composition, another researcher
who conduct research on bank in Ghana also indicate that there is no relationship between firm
performance and board composition (Adusei, 2010). Many authors like (Omer, 2003), (Lefort &
Urzua, 2008), (Krivogorsky, 2006) indicates positive relationship between financial performance
and board composition of the company, other like (Erickson et al, 2005), (Coles et al,2001)
indicates negative relationship between firm performance and board composition. (Bhagat &
Black, 2002) & (De Anders et al, 2005) said in their studies that there is no relationship and
association between firm performance due to and board composition.

Audit committee
As Per the code of corporate governance every commercial bank working under central bank of
county must develop at least three committees which are, Risk and audit committee, main board
management committee and remuneration committee. The fundamental reasons for these
committees are to supervise, monitor and control the activities of members of board, person who
supervise this committee is outside director who is also a permanent member of these committee
(RBZ, 2004). Another researcher (Romano, 2012) concluded in his study that audit committee is
like a blood for a firm, these committees are very vital for an organization controlling and
monitoring activities are performed by management and one of the basic function of these
committees are to protect the rights of shareholders. Another author has same viewpoint that these
committees are tool for monitoring activities of management and these committees have positive
relationship with financial performance of a firm, they also improve the efficiency of banks
(Bussoli, 2013). These committees are one who monitor the financial accounts of a firm and guide
the management about the performance of the company and their opinion and feed back in every
meeting, they also provide all information to the board directors with their recommendations (kig,
2006). According to (vance, 2010) in his study he find that audit committee have positive
relationship with financial performance of banks the financial accounts are improved due to the
supervision of audit committee. Number of meetings are conducted on periodic bases which
improve the performance of firm due to the recommendation being given by audit committee.
Furthermore, a study by (Rubarsky & Pincus, 2000) suggest that there should be more meeting to
improve the financial performance of the company, same results were given by (Mc Mullen
Pincus, 2002) in his study, According to his study financial performance is improved when number
of meetings are conducted by the committees, some researcher like (Klein, 2002) find in his study
that number of meeting create negative impact on performance of company. Many researcher find
positive relation in their studies and many of them find negative relation with number of meeting
and audit committee meeting