The corporate scandals such as Enron, Global Crossing, Tyco, and World Com have shaken the Investors'

confidence and made it difficult for companies to raise equity from the stock market (Agrawal, 2005). The health of the financial system has vital importance and role in the country (Das & Ghosh, 2007) as the failure can disrupt economic development of the country (Abor, 2007). Corporate governance was one of the factors contributing to the financial crises that swept Asia beginning in 1997 (Mitton, 2002) (Lemmon & Lins, 2003). On the same way, a global financial challenge in late 2007 raised various question to settle financial sector stability and which become a central challenge to bank regulators and supervisors (Nepal Rastra Bank, 2010).

 Corporate governance issues are getting special importance in transition economies, as these countries do not have the long-established financial institution infrastructure to deal with corporate governance issues (McGee, 2010). Meanwhile, the given infant stage of securities market development and gradual transformation of the external sources of corporate finance from bank to market, Nepal is passing through a transitional phase of institutional and governance reform (Pokhrel, 2007). The relationship between bank governance and its performance could be studied by investigating the impact of element of corporate governance (namely board size, board independence, audit committee size and audit diligence and ownership structure) on bank performance. Several organizations like OECD, the World Bank, the IFiC , U.S. Commerce and State Departments have popped up in recent years to help adopt and implement good corporate governance principles (McGee, 2010).

 Nepalese Organization are mostly family owned and operated by inexperienced family members holding positions like mangers, accountants and other senior positions (Pradhan & Adhikari, 2009). Ultimately, the high concentration of corporate ownership structure and dominance of family business groups in corporate affairs have become major constraints in exercising good corporate governance (Pokhrel, 2007). Nepalese financial sectors were shocked when
Nepal development bank went into liquidation in 2009, NRB's management takeover action against Nepal Bangladesh Bank in 12/11/2006, action against Gorkha Development Bank for Corporate Governance in 2011, Paschimanchal Development Bank's CEO suspension for lack of Corporate Governance in 2011 , action against People's Finance limited in 2011, action against Nepal Share market limited in 2011, activation of 'lender of last resort' measure in favor of Vibor Development Bank to solve the liquidity crisis in 2011. Kamal Gyawali Case

 The major objective of this research study is to determine the impact of Board Composition (Board Size, No. of Public Director, Professional Director, and Female Director) on firm performance (ROA & ROE) in Nepalese Banks.

CONCEPTUAL FRAMEWORK
Figure 1. The Research Model
CG Variables

Board Composition BSIZE = Board size PRODIR = Professional Director PDIR = No of Public Director BDIVERSITY = No of Female Directors

Firm Performance ROE = Return on Equity ROA = Return On Assets

H1

H1

Board size is negatively related to bank performance. Professional Director/ Board independence is positively related to bank performance. Board Diversity is positively related to bank performance. Public Director is positively related to Bank performance

H2
H3 H4

 This study has employed descriptive, correlation and regression research designs An effort has also been made to describe the nature of 21 enterprises consisting of 105 observations during fiscal year 2007/08 through 2011/12. This study is also based on correlation research design. This design has been adopted to ascertain and understand the directions, magnitudes and forms of observed relationship between CG variables and firm specific variables. This study has also employed multiple linear regression research design to determine the impact of Corporate Governance on the Financial Performance of the Banks. The basic purpose of employing such research design in this study is to test the hypothesis and examine whether it is possible to predict performance on the basis of information about firm specific CG and control variables

S.N. 1 2

Name NABIL Bank Limited (NABIL) Nepal Investment Bank Limited (NIBL)

Operation 1984/07/16 1986/02/27

3
4 5 6

Standard Chartered Bank Nepal Ltd. (SCBN)

Himalayan Bank Limited (HBL) Nepal SBI Bank Limited (NSBI) Everest Bank Limited (EBL)

1987/01/30
1993/01/18 1993/07/07 1994/10/18

7
8 9 10

Bank of Kathmandu Limited (BOK)

Nepal Credit and Commerce Bank Ltd. (NCCBL) Lumbini Bank Limited (LBL) Nepal Industrial & Commercial Bank Ltd. (NIC)

1995/03/12
1996/10/14 1998/07/17 1998/07/21

11
12 13 14

Machhapuchchhre Bank Limited (MBL)

Kumari Bank Limited (KBL) Laxmi Bank Limited (LXBL) Siddhartha Bank Limited (SBL)

2000/10/03
2001/04/03 2002/04/03 2002/12/24

S.N. 15 16 17 18 19 20 21

Name Global Bank Limited (GBL) Citizens Bank International Limited (CBIL) Prime Commercial Bank Limited (PCBL) Sunrise Bank Limited (SRBL) Bank of Asia Nepal Limited (BOA) DCBL Bank Limited (DCBL) NMB Bank Limited (NMB)

Operation 2007/01/02 2007/06/-21 2007/09/24 2007/10/12 2007/10/12 2008/05/25 2008/06/02

S.N 1.

Sources of Data Nepal Stock Exchange (NEPSE)

Period 2007/08-2011/12

2.
3. 4.

Securities Board of Nepal (SEBON)

Annual Reports of Selected Banks Nepal Rastra Bank official Website

2007/08-2011/12
2007/08-2011/12 2007/08-2011/12

Variables

Acronym

Measurement

Dependent variables (Profitability):

Return on Equity Return on Assets Hypothesized variables: Board Size Public Director Professional Director Board Diversity Control variables: Firm Size FSIZE The book value of the total assets of the company. Leverage / Debt proportion DEBT The percentage of total liabilities to total assets. Non Perfoming Loan Ratio NPL The percentage of non-performing loans to total loan. BSIZE PDIR PRODIR BDIVERSITY Total number of directors on the board. No of Public Director No of Professional Director No of Female Director ROE ROA The percentage of Net Income to total equity. The percentage of Net Income to total assets.

 ROE = 0 + 1 * BSIZE + 2 * PDIR + 3 * PRODIR +4 * BDIVERSITY + 5 * FSIZE + 6 * DEBT + 7 * NPL+ ROA = 0 + 1 * BSIZE + 2 * PDIR + 3 * PRODIR +4 * BDIVERSITY + 5 * FSIZE + 6 * DEBT + 7 * NPL+

Descriptive Statistics
N Range Min. Max. Mean Std. D Var. Kurtosis

Statist Std. Error Statistic Statistic Statistic Statistic ic

ROA
ROE BSIZE BDIVERSITY PDIR

105 105 105 105

1.91 1.08 4 3

-.005 -.354 5 0

1.91 .728

Statist Std. Error Statistic Statistic ic 18.59 .096 .0357 .366 .134 0 .467 .011 .122 .817 1.012 .015 5.702 .668 1.126 1.025 -1.442 .467 .467 .467

.1642 07

7.285 9 714E0 .0797 3 .8857 14 .0988

105
105 105 105

3
2 .21 .16

0
0 .74 0

1.533 3 333E0 .0635 2 .9523 .1642 .6952 38 .0508

.651
.521 .036 .025

.424 -.184
.272 -.679 .001 4.953 .001 17.30 3

.467
.467 .467 .467

PRODIR
DEBT NPL

.9010 26 .0035
.0179 43 .0024

Pearson Correlation Table

ROA ROA Pearson Correlation 1 Sig. (2-tailed) .238 ROE Pearson Correlation .116 Sig. (2-tailed) .238 BSIZE Pearson Correlation .197* -.077 Sig. (2-tailed) .044 .432 .687 .003 .158 .455 .127 .030 1 .040 .289** .139 -.074 -.150 .212* .432 .000 .283 .000 .000 .000 .446 1 -.077 -.375** .106 .339** .479** .340** .075 .044 .035 .094 .153 .003 .236 .280 .116 .197* -.206* .164 .140 .288** .117 .106 ROE BSIZE BDIVERSITY PDIR PRODIR FSIZE DEBT NPL

ROA
BDIVERSITY Pearson Correlation -.206* PDIR Pearson Correlation .164 Sig. (2-tailed) .094 PRODIR Pearson Correlation .140 Sig. (2-tailed) .153 FSIZE Pearson Correlation .288** Sig. (2-tailed) .003

ROE
-.375**

BSIZE BDIVERSITY PDIR PRODIR FSIZE

.040 1 -.767** -.467** -.166

DEBT
-.264**

NPL
-.180

.106 .289**

-.767**

.483**

-.004

.164

.227*

.283

.003

.000

.000

.967

.094

.020

.339**

.139

-.467** .483**

1 .343**

.174

.115

.000

.158

.000

.000

.000

.075

.242

.479**

-.074

-.166

-.004

.343**

.462**

-.158

.000

.455

.090

.967

.000

.000

.107

DEBT

Pearson Correlation .117

Sig. (2-tailed) .236 .000 .127 .007 .094 .075 .000 .960

.340**

-.150

-.264**

.164

.174 .462**

-.005

Model 1

R
.417a

Change Statistics Std. Error Adjusted of the R Square R Square R Square Estimate Change F Change df1 df2 .174 .114 .3450102 .174 2.909 7 97

Sig. F Change .008

b. Dependent Variable: Return on Assets

Model 1

R .631a

Std. Change Statistics Error of Adjusted R Square the R Square R Square Estimate Change F Change df1 df2
.398 .354 .09810 .398 9.151 7 97

Sig. F Change .000

Predictors: (Constant), NPL, DEBT, PRODIR, BSIZE, BDIVERSITY, FSIZE, PDIR Dependent variable: Return on equity

Model 1

Sum of Squares Regression Residual Total

Df

Mean Square

Sig.

2.424
11.546 13.970

7
97 104

.346
.119

2.909

.008a

a. Predictors: (Constant), Non Performing Loan, Debt Proportion, Professional Director, Board Size, Board Diversity, Firm Size, Public Director b. Dependent Variable: Return on Assets

Model 1

Sum of Squares Regression .616 .933 1.550

Df 7 97 104

Mean Square .088 .010

F 9.151

Sig. .000a

Residual Total

a. Predictors: (Constant), NPL, DEBT, PRODIR, BSIZE, BDIVERSITY, FSIZE, PDIR b. Dependent Variable: ROE

Model Unstandardized Coefficients B (Constant) Board Size -.380 .106 -.089 -.033 -.066 Debt Proportion -.378 Non Performing Loan 1.276 1.427 .088 .894 .373 .880 1.136 1.108 -.037 -.341 .734 .719 1.390 Std. Error 1.062 .050 .060 .099 .082 Standardized Coefficients Beta T -.358 .237 2.145 -.245 -1.469 -.059 -.336 -.094 -.813 Sig. .721 .034 .145 .738 .418 .699 .307 .276 .632 1.430 3.257 3.627 1.582 Collinearity Statistics Tolerance VIF

Board Diversity Public Director

Professional Director

a. Dependent Variable: Return on Assets

Unstandardized Coefficients

Standardized Coefficients

Collinearity Statistic t Sig.

Model 1 (Constant) BSIZE BDIVERSITY PDIR PRODIR FSIZE DEBT NPL a. Dependent Variable: ROE

Std. Error

Beta

Tolerance

VIF

-.178 .012 -.069 -.092 .039 2.442E-9 .400

.307 .014 .017 .029 .024 .000 .320 .084 -.572 -.482 .167 .289 .119

-.582 .868 -3.984 -3.144 1.643 2.843 1.249

.562 .387 .000 .002 .104 .005 .215 .692 .311 .273 .620 .621 .709 1.445 3.219 3.667 1.612 1.610 1.410

.445

.410

.093

1.086

.280

.878

1.139

Variables

Specific Hypothesis

Empirically supported Overall support of mechanism

Board Size

H1: Board size is negatively related to bank performance.

Partially supported

Professional Director

H2: Professional director is positively related to bank performance.

Supported by both the model

Board diversity

H3: Board diversity is positively related to bank performance.

Not supported by both the model.

Public Director

H4:Public Director is positively related to bank performance

Supported

 The overall data analysis conclude that there is a positive relationship between the ROA, and Board size, Board diversity, public director, professional director, firm size, debt proportion and non performing loan (overall model) There is also the positive relationship between the Return on equity with the Return on Assets and Board size, Board diversity, public director, professional director, firm size, debt proportion and non performing loan (overall model). There is a positive relationship between the board size and Return on Assets (ROA), which indicates that increase in board size will increase the ROA and vice versa. The relationship between the Board diversity and ROA is inverse, which means that with an increase in board diversity the ROA will decrease and vice versa

 In this research the Board size, Professional director, Public director and Board Diversity are the board composition variable whereas the Return on equity and Return on assets are the Bank performance variable. From the research we can explore that increase in board size will partially increase the bank performance. Similarly, professional director is positively related to the bank performance, which indicates that if there is an increase in number of professional director then it will increase the bank performance. From the research it came to know that board diversity (Female director) is negatively related to the bank performance, so, increase in the number of female director will decrease the performance of bank. On the other hand, public director is positively related to the bank performance, which indicates that increase in the number of public director will also increase the performance of bank.

 The control variables such as firm size, debt and non-performing loan are also taken to measure the bank performance. Firm size is positively correlated with the Return on assets and Return on equity, the bank performance variable. Similarly, the Debt proportion is also positively correlated with the Return on equity and Return on Assets, the bank performance variable. Similarly the Non performing loan is also positively correlated with the bank performance.

 The correlation (ROA and Specified independent variable) R is 0.147 which indicates that there is a positive relation between the Return on Assets and the independent variables but the relationship was not so significant. Similarly R square is 0.174 which indicates that only the 17.4% of variation in the ROA was explained by the selected independent variables. On the other hand, adjusted R square is 0.114 which indicates that only the 11.4% of variation in the Return on Assets was explained by the selected independent variable after adjusting the degree of freedom or the multi co - linearity.