Board, ownership and performance of banks with a dual board system: Evidence from Taiwan
Chi-Jui Huang
Assistant Professor, Department of Banking and Cooperative Management National Taipei University; Taiwan Section Chief of Banking Bureau; Financial Supervisory Commission, Taiwan Research interests: Ethics & Corporate Governance
PP: 219 - 234
Abstract
The influence of corporate governance on a firm's performance has recently been studied in industrial enterprises in developed countries, but not services such as banks with a dual board system in Asia's newly industrialized economies (NIEs). This research examines the effects of board structure and ownership on a bank's performance using a sample of forty-one commercial banks of an Asian NIE (Taiwan). Results showed that board size, numbers of outside directors, and family-owned shares are positively associated with bank performance, whereas the number of supervisory directors has a negative influence on performance. The findings provide empirical support for corporate governance, which improves the performance of banks with a dual board system in Taiwan.
Keywords
Dual boards, ownership, financial performance, corporate governance, supervisory board, Taiwan
Article Text
Corporate governance issues have received recent attention internationally due to the widespread influence of the Asian financial crisis and worldwide financial scandals such as the Enron accounting scandal. At the tenth ministerial meeting of the Asia-Pacific Economic Cooperation (APEC) organisation convened in 1998, the lack of strong corporate governance was pointed out as a key factor preventing further improvements in the international competitiveness of Asian enterprises (Asia-Pacific Economic Cooperation 1998). In 1999 the Organisation for Economic Co-Operation and Development's (OECD) Principles of Corporate Governance were issued, which have served internationally as a benchmark for countries in upgrading their standards of corporate governance. A set of revised Principles was announced in January of 2004. The Basel Committee on Banking Supervision also published 'Enhancing Corporate Governance for Banking Organizations' in February 2006.
The Taiwanese government has recently been promoting corporate governance of companies. The Financial Supervisory Commission (FSC), the competent authority, has designed internal and external governance and supervision mechanisms to solve problems caused by separate ownership and minority shareholder protection. In light of international trends and domestic corporate governance issues, the Taiwanese government approved the establishment of the Taskforce for Reform of Corporate Governance on 7 January 2003. The promotion of better corporate governance for specified organizations (including financial service enterprises) was listed as one of its functions, and a resolution was passed making financial service enterprises the focus of reform efforts during the first phase. To achieve more effective corporate governance practices and to further the sound development of the financial system, the FSC formulated its 'Best-Practice of Corporate Governance Principles for Banks' in March 2003. The code was developed through consultation with the Bankers Association and with reference to (1) the OECD Principles of Corporate Governance and (2) the rules issued by the Basel Committee on Banking Supervision for corporate governance of banks.
The relationship between corporate governance and performance has captured the attention of many scholars. Several studies have focused on industrial enterprise with a unitary board in developed countries (e.g. Short & Keasy 1999; Bonn 2004; Nicholson & Kiel 2007). Finegold, Benson and Hecht (2007), after reviewing 105 studies published between 1989 and 2005, suggested that research on boards and their performance were dominated by investigations of large, public, U.S. firms. Similarly, Sánchez-Ballesta and García-Meca (2007), after analyzing 33 studies published between 1994 and 2006, found that most studies on ownership structure and performance were of large firms in developed countries. However, there has been little empirical research on financial service institutions such as banks with a dual board system like those in Asia's newly industrialized economies (NIEs). The Asian financial crisis of 1997, and the financial distress that more than thirty Taiwanese listed companies experienced from 1998 to 1999 (Lee and Yeh, 2004) demand a better understanding of corporate governance in the banking industry in such countries.
The purpose of this study is to investigate corporate governance in Taiwan's banking industry. Banks play a vital role in the allocation of resources by reducing the information asymmetries. Since banks are such essential sources of external finance, poor bank governance has potential repercussions for every economy (Levine 1997; Hagendorff, Collins & Keasey 2007). Banks, as lenders to enterprises and companies, have played a key role in corporate governance through equity-holdings, cross-shareholdings and reciprocal board membership (Mallin, Mullineux & Wihlborg 2005). Therefore, it is useful to study bank governance. Moreover, an exploration of the bank governance system in Taiwan will help to verify the extent to which existing study findings are apply in the Taiwanese context.
This research takes board characteristics and family ownership to be essential elements of bank governance because of their effect on performance; this conclusion is based on prior research and the principles of the 'Best-Practice of Corporate Governance Principles for Banks'. Furthermore, there has been little empirical study of the simultaneous influences of corporate governance variables, dual boards and ownership on performance in Taiwan. Research in Taiwan has concentrated primarily on the following areas: ownership structure and performance (Chiang & Lin 2007; Li, Hu & Chiu 2004; Her & Mahajan 2005), board and firm performance (Luan & Tang 2007), building a corporate governance index from an ownership perspective (Chen, Kao, Tsao & Wu 2007), ownership structure and financial distress (Lee & Yeh 2004), and the relationship between corporate governance and CEO compensation (Lin 2005). Additionally, although there have been several studies of corporate governance in Taiwan (e.g. Chiang & Lin 2007; Li et al. 2004; Luan & Tang 2007; Chen, Kao, Tsao & Wu 2007), they have not focused on the role of the supervisory board. Prior investigations have not paid attention to supervisory boards because they were considered merely nominal organizations (Dahya, Karbhari, Xiao & Yang 2003). Empirical studies specifically involving the supervisory board are rare. This study may contribute to filling the above gaps in the literature.
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