Corporate Governance and Its Impact on Bank Stability: Evidence from the Pakistan Banking Sector
Keywords:
Pakistan; Banks; Corporate Governance; Bank Risk; Capital Adequacy; Non- performing LoanAbstract
This study investigates the relationship between corporate governance practices and bank stability in Pakistan, focusing on three key performance measures: Bank Z-Score, Bank Capital Adequacy, and Bank Non-Performing Loan. The research involved a sample of 19 commercial banks selected through a simple random sampling method, with data collected from 2010 to 2020. Various statistical models including pooled OLS, Fixed Effect, and Random Effect models were employed to examine this relationship. The findings highlight that director compensation and the presence of independent directors in the audit committee positively influence bank stability, while factors such as board size, non-executive directors, and independent directors do not significantly impact the bank Z-Score. Additionally, board size, composition, and the presence of non-executive directors contribute positively to capital adequacy, whereas audit committee meetings, independence, and size do not show a significant
impact. Lastly, board size, composition, and director compensation significantly affect NPL, highlighting the importance of maintaining a larger board with non-executive directors and competitive director compensation packages for better capital adequacy ratios, and a smaller board to reduce NPL.
References
Abbasi, K. R., Hussain, K., Haddad, A. M., Salman, A., & Ozturk, I. (2022). The role of
financial development and technological innovation towards sustainable development in
Pakistan: fresh insights from consumption and territory-based emissions. Technological
Forecasting and Social Change, 176, 121444.
Garcia-Herrero, A., Gavila, S., & Santabarbara, D. (2009), “What explains the low
profitability of Chinese banks?”, Journal of Banking and Finance, Vol. 33 No. 11, pp.
-2092.
Sivaprasad, S., & Mathew, S. (2021). Corporate governance practices and the pandemic
crisis: UK evidence. Corporate Governance: The international journal of business in
society.
Broadstock, D. C., Chan, K., Cheng, L. T., & Wang, X. (2021). The role of ESG
performance during times of financial crisis: Evidence from COVID-19 in
China. Finance research letters, 38, 101716.
Scherer, A. G., & Voegtlin, C. (2020). Corporate governance for responsible innovation:
Approaches to corporate governance and their implications for sustainable
development. Academy of Management Perspectives, 34(2), 182-208.
Song, H. J., Yeon, J., & Lee, S. (2021). Impact of the COVID-19 pandemic: Evidence
from the US restaurant industry. International Journal of Hospitality Management, 92,
Nisar, S., & Asif, R. (2023). Factors leading to failures of infrastructure development
projects in Pakistan: A systematic literature review. Management Science Letters, 13(1),
-22.
Hussain, S., & Safdar, N. (2018). Tunneling: Evidence from family business groups of
Pakistan. Business and Economic Review, 10(2), 97-121.
Jan, A. A., Lai, F. W., Draz, M. U., Tahir, M., Ali, S. E. A., Zahid, M., & Shad, M. K.
(2021). Integrating sustainability practices into Islamic corporate governance for
sustainable firm performance: From the lens of agency and stakeholder theories. Quality
and Quantity, 1-24.
Houcine, A., Zitouni, M., & Srairi, S. (2021). The impact of corporate governance and
IFRS on the relationship between financial reporting quality and investment efficiency in
a continental accounting system. EuroMed Journal of Business, 96-108.
Shaheen, R., & Nishat, M. (2005). Corporate Governance and Firm Performance an
Exploratory Analysis. Paper Presented at Conference.
Jebran, K., & Chen, S. (2023). Can we learn lessons from the past? COVID‐19 crisis
and corporate governance responses. International Journal of Finance & Economics,
(1), 421-429.
Ali, M. U., Abbasi, S. G., Abbasi, F. A., Abbas, M., Sarwar, S., Shafiqu, O., & Dastgeer,
G. (2020). Impact of Covid-19 on Liquidity of the Banking Sector of Pakistan. PalArch's
Journal of Archaeology of Egypt/Egyptology, 17(4), 2045-2068.
High-Level Group on Financial Supervision in the EU. (2009). The DeLarosière Report.
European Commission.
Khanifah, K., Hardiningsih, P., Darmaryantiko, A., Iryantik, I., & Udin, U. D. I. N.
(2020). The effect of corporate governance disclosure on banking performance: Empirical evidence from Iran, Saudi Arabia and Malaysia. The Journal of Asian Finance,
Economics, and Business, 7(3), 41-51.
Orazalin, N., & Mahmood, M. (2019). The financial crisis as a wake-up call: corporate
governance and bank performance in an emerging economy. Corporate Governance: The
International Journal of Business in Society.
Haris, M., Yao, H., Tariq, G., Javaid, H. M., & Ain, Q. U. (2019). Corporate governance,
political connections, and bank performance. International Journal of Financial Studies,
(4), 62.
Felício, J. A., Rodrigues, R., Grove, H., & Greiner, A. (2018). The influence of corporate
governance on bank risk during a financial crisis. Economic Research-Ekonomska
Istraživanja, 31(1), 1078-1090.
Nawaz, T. (2017). Exploring the Nexus Between Human Capital, Corporate Governance
and Performance: Evidence from Islamic Banks. Journal of Business Ethics, 157, 567-
Emmanuel, M., & Theodora, B. (2015). The Effect of Corporate Governance on the
Performance of US Investment Banks. Financial Markets, Institutions & Instruments,
(2-3), 0963-8008.
Thoraneenitiyan, N. (2010). Measuring bank performance in the current evolving
financial marketplace. Abac Journal, 30(3).
Kirkpatrick, G. (2009). The corporate governance lessons from the financial crisis.
OECD Journal: Financial Market Trends, 2009(1), 61-87.
Quang Trinh, V. (2022). Corporate Governance in Banking. In Fundamentals of Board
Busyness and Corporate Governance (pp. 19-27): Springer.
Nisar, S., Asif, R., & Ali, A. (2021). Testing the Presence of the January Effect in
Developed Economies. Journal of Finance and Accounting Research (JFAR), 3(2), 1-16.
Aslam, E., Haron, R., & Ahmad, S. (2021). A comparative analysis of the performance of
Islamic and conventional banks: does corporate governance matter? International
Journal of Business Excellence, 24(1), 53-67.
Mathew, S., Ibrahim, S., & Archbold, S. (2018). Corporate governance and firm risk.
Corporate Governance: The International Journal of Business in Society, 18(1), 52-67.
Adams, R. B., & Mehran, H. (2012). Bank board structure and performance: Evidence for
large bank holding companies. Journal of Financial Intermediation, 21(2), 243–267.
Andries, A. M., Balutel, D., Ihnatov, I., & Ursu, S. G. (2020). The nexus between
corporate governance, risk taking, and growth. PloS one, 15(2), e0228371.
Koirala, S., Marshall, A., Neupane, S., & Thapa, C. (2020). Corporate governance reform
and risk-taking: Evidence from a quasi-natural experiment in an emerging
market. Journal of Corporate Finance, 61, 101396.
Marie, M., Kamel, H., & Elbendary, I. (2021). How does internal governance affect
banks’ financial stability? Empirical evidence from Egypt. International Journal of
Disclosure and Governance, 18(3), 240–255.
Raouf, H., & Ahmed, H. (2022). Risk governance and financial stability: a comparative
study of conventional and Islamic banks in the GCC. Global Finance Journal, 52,
Zeineb, G., & Mensi, S. (2018). Corporate governance, risk and efficiency: Evidence
from GCC Islamic banks. Managerial Finance, 44(5), 551–569.
Mullineux, A. (2006). The corporate governance of banks. Journal of Financial
Regulation and Compliance, 14(4), 375–382.
Gaganis, C., Lozano-Vivas, A., Papadimitri, P., & Pasiouras, F. (2020). Macroprudential
policies, corporate governance and bank risk: Cross-country evidence. Journal of
Economic Behavior & Organization, 169, 126-142.
Salim, R., Arjomandi, A., & Seufert, J. H. (2016). Does corporate governance affect
Australian banks' performance?. Journal of International Financial Markets, Institutions
and Money, 43, 113-125.
Lipton, M., & Lorsch, J. W. (1992). A modest proposal for improved corporate
governance. The Business Lawyer, 59-77.
Sheikh, M. F., Shah, S. Z. A., & Akbar, S. (2018). Firm performance, corporate
governance and executive compensation in Pakistan. Applied Economics, 50(18), 2012-
Liu, G., Sun, J., 2021. Independent directors’ legal expertise, bank risk-taking and
performance. J. Contemp. Account. Econ. 17 (1), 100240.
Bolton, P., Mehran, H., & Shapiro, J. (2000). Executive compensation and risk taking.
Review of Financial Studies, 22(10), 4179-4217.
Bolton, P., Chen, H., & Wang, N. (2011). A unified theory of Tobin's q, corporate
investment, financing, and risk management. The journal of Finance, 66(5), 1545-1578.
Ayadi, W. M., & Boujelbène, Y. (2015). Internal governance mechanisms and value
relevance of accounting earnings: an empirical study in the French context. International
Journal of Managerial and Financial Accounting, 7(1), 3-25.
Grove, H., Patelli, L., Victoravich, L. M., & Xu, P. (2011). Corporate governance and
performance in the wake of the financial crisis: Evidence from US commercial banks.
Corporate Governance: An International Review, 19(5), 418-436.
Fosberg, R. H. (1989). Outside directors and managerial monitoring. Akron Business and
Economic Review, 20(2), 24-32.
Zhou, J., & Chen, K. Y. (2004). Audit committee, board characteristics and earnings
management by commercial banks. Unpublished manuscript.
Bédard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee
expertise, independence, and activity on aggressive earnings management. Auditing: A
journal of practice & theory, 23(2), 13-35.
Aslam, E., Haron, R., & Tahir, M. N. (2019). How director remuneration impacts firm
performance: An empirical analysis of executive director remuneration in Pakistan. Borsa
Istanbul Review, 19(2), 186-196.
DesJardine, M. R., & Shi, W. (2021). How temporal focus shapes the influence of
executive compensation on risk taking. Academy of Management Journal, 64(1), 265-
Kirsten, E., & Du Toit, E. (2018). The relationship between remuneration and financial
performance for companies listed on the Johannesburg Stock Exchange. South African
Journal of Economic and Management Sciences, 21(1), 1-10.
Kasmir. (2016). Manajemen Sumber Daya Manusia (Teori dan Praktik). Depok: PT
Rajagrafindo Persada.
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal
control systems. Journal of Finance, 48(3), 831–880.
Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. The Journal
of Law and Economics, 26(2), 327-349.
Coles, J. L., Daniel, N. D., & Naveen, L. (2008). Boards: Does One Size Fit All? Journal
of Financial Economics, 87(2), 329–356.
Cheng, S., Evans, J. H., & Nagarajan, N. J. (2008). Board size and firm performance: The
moderating effects of the market for corporate control. Review of Quantitative Finance
and Accounting, 31(2), 121–145.
Kirkpatrick, G. (2009). The corporate governance lessons from the financial crisis.
OECD Journal: Financial Market Trends, 2009(1), 61-87.
Syaepullah, R. (2022). The Influence of Financial Ratio and Corporate Governance on
Financial Distress in Indonesian Islamic Banking Period 2013–2019. EKONOMIKA
SYARIAH: Journal of Economic Studies, 5(2), 81-94.
Rashid, A. (2022). Impacts of Bank-Specific and Macroeconomic Risks on Growth and
Stability of Islamic and Conventional Banks: An Empirical Analysis from Pakistan. The
Journal of Asian Finance, Economics and Business, 9(2), 1-14.
Adams, R. B., & Mehran, H. (2012). Bank board structure and performance: Evidence for
large bank holding companies. Journal of Financial Intermediation, 21(2), 243–267.
Baxter, P., & Cotter, J. (2009). Audit committees and earnings quality. Accounting &
finance, 49(2), 267-290.
Chineme, O. B., Eugene, P., & Nwadialo, O. (2018). Effect of Board Size on the Capital
Adequacy of Money Deposit Banks. International Journal of Business, Economics and
Entrepreneurship Development in Africa, 10.
Chitan, G. (2012). Corporate Governance and Bank Performance in the Romanian
Banking Sector. Procedia Economics and Finance, 3, 549–554.
Indrawan, V., Agoes, S., Pangaribuan, H., Muse, O., & Popoola, J. (2018). The Impact of
Audit Committee, Firm Size, Profitability, and Leverage on Income Smoothing. In
Journal of Accounting and Finance (IPJAF (Vol. 2, Issue 1).
Karkowska, R., & Acedański, J. (2020). The effect of corporate board attributes on bank
stability. Portuguese Economic Journal,
Nguyen, Q. K. (2021). Oversight of bank risk-taking by audit committees and Sharia
committees: conventional vs Islamic banks. Heliyon, 7(8), e07798.
Nguyen, Q. K. (2021). Oversight of bank risk-taking by audit committees and Sharia
committees: conventional vs Islamic banks. Heliyon, 7(8), e07798.
Raviv, A., & Sisli-Ciamarra, E. (2013). Executive compensation, risk taking and the state
of the economy. Journal of Financial Stability, 9(1), 55-68.
Rehman, M., Rehman, R., & Raoof, A. (2010). Does corporate governance lead to a
change in the capital structure? American Journal of Social and Management Sciences,
(2), 191–195.
Tarchouna, A., Jarraya, B., & Bouri, A. (2017). How to explain non-performing loans by
many corporate governance variables simultaneously? A corporate governance index is
built to US commercial banks. Research in International Business and Finance, 42,
–657.
Tetteh, E. O. (2019). The Impact of Corporate Governance on Asset Quality of Banks. A
Case of the Ghanaian Banking Sector. Unpublished Master’s thesis, University of Ghana.
Wang, W. K., Lu, W. M., & Lin, Y. L. (2012). Does corporate governance play an
important role in BHC performance? Evidence from the U.S. Economic Modelling, 29(3),
–760.
Lau, J., Sinnadurai, P., & Wright, S. (2009). Corporate governance and chief executive
officer dismissal following poor performance: Australian evidence. Accounting &
Finance, 49(1), 161-182.
Blanchard, D., & Dionne, G. (2004). The case for independent risk management
committees. Risk, 17(5), S19-S21.
Permatasari, I., & Novitasary, R. (2014). Pengaruh Implementasi Good Corporate
Governance terhadap Modal dan Kinerja Perbankan di Indonesia: Manajemen Risiko
Sebagai Variabel Intervening. Jurnal Ekonomi Kuantitatif Terapan, 7(1).
Prasojo. (2015). Pengaruh Penerapan Good Corporate Governance terhadap Kinerja
Keuangan Bank Syariah. Jurnal Dinamika Akuntansi dan Bisnis, 2(1), 59–69.
Andres, P. D. & Vallelado, E. (2008), “Corporate governance in banking: The role of the
board of directors”, Journal of Banking and Finance, Vol. 32 No. 12, pp. 2570-2580.
Sun, J., & Liu, G. (2014). Audit committees’ oversight of bank risk-taking. Journal of
Banking & Finance, 40, 376-387.
Tanna, S., Pasiouras, F., & Nnadi, M. (2011). The effect of board size and composition
on the efficiency of UK banks. International Journal of the Economics of Business, 18,
-462.
Rasoava, R. (2019). Executive compensation and firm performance: A non-linear
relationship. Problems and Perspectives in Management, 17(2), 1-17.
Elsayed, N., & Elbardan, H. (2018). Investigating the associations between executive
compensation and firm performance: Agency theory or tournament theory. Journal of
Applied Accounting Research, 19(2), 245-270.
Buachoom, W. (2017). Simultaneous relationship between performance and executive
compensation of Thai non-financial firms. Asian Review of Accounting, 25(3), 404-423.
Elyasiani, E., & Jia, J. (2010). Distribution of institutional ownership and corporate firm
performance. Journal of Banking & Finance, 34(3), 606-620.
Smirnova, A. S., & Zavertiaeva, M. A. (2017). Which came first, CEO compensation or
firm performance? The causality dilemma in European companies. Research in
International Business and Finance, 42, 658-673. Available at:
Das, A., & Dey, S. (2016). Role of corporate governance on firm performance: A study
on large Indian corporations after implementation of companies’ act 2013. Asian Journal
of Business Ethics, 5(1-2), 149-164. Available at: https://doi.org/10.1007/s13520-016-
-7.
Bussin, M., & Modau, M. F. (2015). The relationship between Chief executive officer
remuneration and financial performance in South Africa between 2006 and 2012. SA
Journal of Human Resource Management, 13(1), 1-18. Available at:
https://doi.org/10.4102/sajhrm.v13i1.668.
Dang, H. N., Pham, C. D., Nguyen, T. X., & Nguyen, H. T. T. (2020). Effects of
corporate governance and earning quality on listed Vietnamese firm value. The Journal
of Asian Finance, Economics and Business, 7(4), 71-80.
Kiel, G.C., & Nicholson, G.J., (2003) Board composition and corporate performance:
How the Australian experience informs contrasting theories of corporate governance. Corporate Governance: An International Review 11(3):189–205. doi: 10.1111/1467-8683.00318.
Andries, A. M., & Brown, M. (2017) Credit booms and busts in emerging markets: The
role of bank governance and risk management. Economics of Transition 25(3):377–437.
doi: 10.1111/ecot.12127.
Akwaa-Sekyi, E.K., & Moreno, J. (2017) Internal controls and credit risk relationship
among banks in Europe. Intangible Capital 13(1):25–50. doi: 10.3926/ic.911.
Pathan, S. (2009) Strong boards, CEO power and bank risk taking. Journal of Banking
and Finance 33:1340–1350. doi: 10.1016/j.jbankfin.2009.02.001.
Rachdi, H., Trabelsi, & M.A., Trad, N.A. (2013) Banking Governance and Risk: The
Case of Tunisian Conventional Banks. Review of Economic Perspectives 13(4):195–206.
doi: 10.2478/revecp-2013-0009.
Sanda, A.U., Mikailu, A.S., & Garba, T. (2010) Corporate governance mechanisms and
firms' financial performance in Nigeria. Afro-Asian Journal of Finance and Accounting
(1):22-39.
Bhagat, S., & Black, B. (2002) The non-correlation between board independence and
long-term firm performance. Journal of Corporation Law 27(2):231–273.
Cornett, M.M., Marcus, A.J., & Tehranian, H. (2008) Corporate governance and pay-for-
performance: the impact of earnings management. Journal of Financial Economics
:357–373. doi: 10.1016/j.jfineco.2007.03.003.
Fama, E.F., & Jensen, M.C. (1983) Separation of ownership and control. Journal of Law
and Economics 26(2):301–325.
Setiawan, A.R., & Zunairoh, B. (2020) Executive compensation and risk: An empirical
study in Indonesia. In: Advances in Business, Management and Entrepreneurship. CRC
Press, pp. 329–333.
Poudel, R. P., & Hovey, M. (2012). Corporate governance and efficiency in Nepalese
commercial banks. Available at SSRN 2163250.
Al-Smadi, M. O. (2013). Examining the relationship between corporate governance and
banks’ performance, and risk in Saudi Arabia. European Journal of Economics, Finance
and Administrative Sciences, 59, 6–18.
Abubakar, S., Abubakar, M., Shehu, A. S., & Nahari, P. M. (2015). Do audit committee
size and financial expertise impact on discretionary loan loss provision? Evidence from
deposit money banks in Nigeria. Abuja Journal of Business and Management, 1(3),
–111.
Magembe, J. M., Ombuki, C., & Kiweu, M. (2017). An empirical study of corporate
governance and loan performance of commercial banks in Kenya. International Journal
of Economics, Commerce and Management, 5(11), 580–604.
Ojeka, S., Adegboye, A., & Dahunsi, O. (2021). Audit Committee Characteristics and
Non-Performing Loans in Nigerian Deposits Banks. European Journal of Accounting,
Auditing and Finance Research, 9(4), 27-41.
Hermalin, B. E., & Weisbach, M. S. 1991. The effects of board composition and
direct incentives on firm performance. Financial management 20(4): 101-112.
Vafeas, N. (1999). Board meeting frequency and firm performance. Journal of
Financial Economics, 53(1), 113-42.
Conger, J. A., Finegold, D., & Lawler, E. E. I. I. I. (1998). Appraising boardroom
performance. Harvard Business Review, 76(1), 136-48.
Boateng, A., Liu, Y., & Brahma, S. (2019). Politically connected boards,
ownership structure and credit risk: Evidence from Chinese commercial banks. Research
in International Business and Finance, 47, 162–173.
Elamer, A. A., Ntim, C. G., Abdou, H. A., & Pyke, C. (2020). Sharia supervisory
boards, governance structures and operational risk disclosures: Evidence from Islamic
banks in MENA countries. Global Finance Journal, 46, 100488.
Dong, Y., Girardone, C., & Kuo, J. M. (2017). Governance, efficiency and risk-
taking in Chinese banking. The British Accounting Review, 49(2), 211–229.
Sani, U., Gorowa, Ali, J. I. (2017). Effect of Corporate Governance on Asset
Quality: Performance Evaluation of the Nigerian Banking Sector in the Post
Consolidation Era. International Journal of Accounting, Finance and Risk Management.
Vol. 2, No. 1, 2017, pp. 1-9. doi: 10.11648/j.ijafrm.20170201.11
Abou-El-Sood, H. (2017). Corporate governance structure and capital adequacy:
implications to bank risk taking. International Journal of Managerial Finance.
Raithatha, M., & Komera, S. (2016). Executive compensation and firm
performance: Evidence from Indian firms. IIMB Management Review, 28(3), 160-169.
Saputri, L., & Asrori, A. (2019). The effect of leverage, liquidity and profitability
on financial distress with the effectiveness of the audit committee as a moderating
variable. Accounting Analysis Journal, 8(1), 38-44.
Larasati, H., & Wahyudin, A. (2019). The Effect of Liquidity, Leverage, and
Operating Capacity on Financial Distress with Managerial Ownership as a Moderating
Variable. Accounting Analysis Journal,8(3), 214–220.
https://doi.org/10.15294/aaj.v8i3.30176
Mollah, S., Liljeblom, E., & Mobarek, A. (2021). Heterogeneity in independent
non-executive directors' attributes and risk-taking in large banks. Journal of Corporate
Finance, 70, 102074.
Tulung, J. E., Ramdani, D. (2018) Independence, size and performance of the
board: An emerging market research. Corporate Ownership & Control 15(2).
Ballester, L., González-Urteaga, A., & Martínez, B. (2020). The role of internal
corporate governance mechanisms on default risk: A systematic review for different
institutional settings. Research in International Business and Finance, 54, 101293.
