Do disclosure and transparency affect bank’s financial performance?

• DOI: https://doi.org/10.1108/CG-12-2018-0378
• Pages: 1344-1361
• Date: 27 August 2019
• Published date: 27 August 2019
• Author: Isaiah Oino
• Subject Matter: Strategy

Do disclosure and transparency affect

bank’sf‌inancial performance?

Isaiah Oino

Abstract

Purpose –The purpose of this paper is to examine the impact of transparency and disclosure on the

financial performance of financial institutions. The emphasis is on assessing transparency and

disclosure; auditing and compliance; risk management as indicators of corporate governance; and

understandinghow these parameters affectbank profitability, liquidity andthe quality of loan portfolios.

Design/methodology/approach –A sample of 20 financial institutions was selected, with ten

respondents from each, yielding a total sample size of 200. Principal component analysis (PCA), with

inbuilt ability to check for composite reliability, was used to obtain composite indices for the corporate

governance indicators as well as the indicators of financial performance, based on a set of questions

framedfor each institution.

Findings –The analysis demonstratesthat greater disclosure and transparency,improved auditing and

compliance and better risk management positively affect the financial performance of financial

institutions. In terms of significance, the results show that as the level of disclosure andtransparency in

managerial affairs increases, the performance of financial institutions –as measured in terms of the

quality of loan portfolios,liquidity and profitability –increases by 0.3046,with the effect being statistically

significantat the 1 per cent level. Furthermore, as the levelof auditing and the degree of compliance with

bankingregulations increases, the financial performanceof banks improves by 0.3309.

Research limitations/implications –This paper did not consider time series because corporate

governancedoes not change periodically.

Practical implications –This paper demonstrates the importance of disclosure and transparency in

managerial affairs because the performance of financial institutions, as measured in terms of loan

portfolios,liquidity and profitability, increasesby 0.4 when transparency anddisclosure improve, with this

effectbeing statistically significant at the 1 per cent level.

Originality/value –The use of primary data in assessing the impact of corporate governance on

financial performance,instead of secondary data, is the primary novelty of this study.Moreover, PCA is

used to assessthe weight of the various parameters.

Keywords Corporate governance, Financial performance, Principal component analysis,

Financial institutions

Paper type Research paper

Introduction

The wave of corporate scandals that swept across the business world over the past decade in

both Europe and the USA (e.g. Socie

´te

´Ge

´ne

´ral, Lehman Brothers, etc.) has raised questions

as to what type of board structure and composition can best monitor and control the ac tivities

of an organisation’s management. The management of many well-known companies was

found to be engaged in dubious, questionable and even fraudulent accounting practices,

which their boards were not able to detect in time. Fraud, mismanagement and poor

monitoring of agents’ activities resulted in a lack of transparency and accountability, making

highly influential companies vulnerable to litigation and corporate failure. This sit uation has led

to the creation of a set of regulatory codes and corporate governance reports, whose aim was

to ensure effective governance and improve the overall performance of major firms.

Isaiah Oino is based at

Business School, Faculty of

Business and Law,

Coventry University,

Coventry, UK.

Received 10 December 2018

Revised 17 June 2019

Accepted 26 June 2019

PAGE 1344 jCORPORATE GOVERNANCE jVOL. 19 NO. 6 2019, pp. 1344-1361, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-12-2018-0378

Wilson (2006) noted that poor corporate governance can lead to the loss of market confidence

in the ability of banks to properly manage their assets and liabilities, which could inturn trigger

liquidity crises. The strength of the corporate governance mechanisms of f inancial institutions

determines the robustness of the financial system and its vulnerability to uncertainty and risks.

A study by Drobetz et al. (2003) showed that good corporate governance can lead to higher

valuations; profitability and sales growth; and lower capital expenditure. Th e basic building

blocks of corporate governance structures include directors, accountability and a udits,

directors’ remuneration, shareholder oversight and AGMs. Cadbury (1992),Greenbury (1995)

and Hampel (1998) identified the need for greater transparency and accountability in areas

such as board structure and operation, directors’ contracts and board monitoring. In addition,

they all stressed the importance of the role of non-executive directors. Previous research by

Acero and Alcalde (2012) and Farag and Mallin (2019) showed that the structure and

composition of boards is usually determined by the characteristics o f the company, its

environment and its information needs. In general, board structures are usually the function of

the costs and benefits of monitoring. This paper follows the example of Njekang and Af uge

(2017) in Cameroon, who analysed the impact of corporate governance on the financial

performance of credit unions.

The interaction between good corporate governance practices and corporate social

responsibility (CSR) disclosure, as a transparency mechanism, neither has been analysed

extensively nor has the effect of this specific mechanism on financial performance (Jain and

Jamali, 2016). Baumann and Nier (2004) greater disclosure reduces overall risk and boosts

risk-adjusted returns. Galbreath (2006), meanwhile, reported that full and open disclosure

via triple bottom line reporting enhances both transparency and accountability. These are

all highly important topics in the currentbanking environment post the global financial crisis.

Research objectives

The main objective of this study is to determine the effects of key aspects of corporate

governance on the financial performance of financial institutions.Specifically, it seeks to:

䊏assess the effects of board role and composition on the financial performance of

financial institutions based in London;

䊏examine the impact of transparency and disclosure on the financial performance of

these financial institutions; and

䊏evaluate the effects of improved auditing and compliance, as well as risk management,

on the financial performance of these financial institutions.

Research hypotheses

This study seeks to test thenull hypotheses that:

H1. Board role and composition have no effect on the financial performance of financial

institutionsin London.

H2. Transparency and disclosure do not affect the financial performance of financial

institutions.

H3. Improved auditing and compliance have no effect on the financial performance of

financial institutions.

H4. Risk managementhas no effect on the financial performanceof financial institutions.

Review of the literature

Governance in the banking industry changed dramatically in the 1990s because of

significant changes in ownership that came about as a result of mergers and

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