Does corporate governance structures promote shareholders or stakeholders value maximization? Evidence from African banks

• Date: 03 April 2018
• Pages: 270-288
• Published date: 03 April 2018
• DOI: https://doi.org/10.1108/CG-09-2016-0177
• Author: Baah Aye Kusi,Agyapomaa Gyeke-Dako,Elikplimi Komla Agbloyor,Alexander Bilson Darku
• Subject Matter: Strategy,Corporate governance

Does corporate governance structures

promote shareholders or stakeholders

value maximization? Evidence from

African banks

Baah Aye Kusi, Agyapomaa Gyeke-Dako, Elikplimi Komla Agbloyor and

Alexander Bilson Darku

Abstract

Purpose –The purpose of this paper is to explore the relationship between corporate governance

structures and stakeholder and shareholder valuemaximization perspectives in 267 African banksfrom

2006 to 2011.

Design/methodology/approach –The authors used the Prais–Winsten ordinary least squares and

random effect regression models to explore this relationship to ensure consistency and efficiency in

results.The data for this study were collectedfrom Bankscope.

Findings –The results of this study show that corporate governance structures such as CEO duality,

nonexecutive members and extreme large board size lead to a reduction in both shareholder and

stakeholder value maximization. However, audit independence and board size also promote both

shareholder and stakeholder value maximization. Although gender diversity promotes profit

maximization, it was not significant in any of the models estimated.The results further suggest that the

same corporate governance structures promote and detract shareholder and stakeholder value

maximization in Africa although the effect of corporate governance structures was weightier on

shareholdervalue maximization confirming the agencytheory.

Practical implications –From these findings, bank management must pursue the institution of good

corporate governance structures and avoid weak corporate governance structures to promote

shareholderand stakeholder value maximization.Also equity holders may have to pay particular attention

to corporate governancestructures because they benefit the most from the institutionof good corporate

governancestructures.

Originality/value –This study explores and compares how corporate governance structures promote

shareholder and stakeholdervalue maximization separately in African banks.To the best of the authors’

knowledge,this is the first of such studies.

Keywords Africa, Corporate governance, Stakeholder theory, Bank profitability, Shareholder theory

Paper type Research paper

1. Introduction

Corporate governance involves a set of relationships between a company’s management,

its board, its shareholders andother stakeholders. Corporate governance also provides the

structure through which the objectives of the company are set and the means through

which those objectives are determined (OECD, 2004; Shleifer and Vishny, 1997). It also

involves monitoring performance of firms. This means that corporate governance has

emerged as a critical mechanism for accelerating firm performance and economic growth

(Aggarwal et al.,2011;Stafsudd, 2009;Jadhav and Katti, 2012;Hasan et al., 2014).

Baah Aye Kusi is PhD

Student,

Agyapomaa Gyeke-Dako is

Lecturer and

Elikplimi Komla Agbloyor is

Senior Lecturer, all at the

Department of Finance,

University of Ghana

Business School, Accra,

Ghana.

Alexander Bilson Darku is

Instructor at the

Department of Economics,

University of Lethbridge,

Lethbridge, Canada.

Received 25 August 2016

Revised 5 September 2016

19 January 2017

16 March 2017

11 May 2017

5 June 2017

24 July 2017

29 August 2017

20 September 2017

Accepted 14 October 2017

PAGE 270 jCORPORATE GOVERNANCE jVOL. 18 NO. 2, 2018, PP. 270-288, © EMERALD PUBLISHING LIMITED, ISSN 1472-0701 DOI 10.1108/CG-09-2016-0177

Corporate governance structuresin prior studies are evidently represented as CEO duality,

board size, board gender, audit committee independence and nonexecutive members on

the board. Given the potential of corporate governance promoting economic growth and

firm performance, many studies have explored these benefits associated with it at the

national and firm levels (La Porta et al.,2000;Hasan et al., 2014). Studies including Shleifer

and Wolfenzon (2002),Abdullah (2004) argued that effective or strong corporate

governance structures form a corporate atmosphere that discourages corporate insiders or

managers from pursuing their own value, alleviates the risk of mismanagement or

negligence and hence enhances firm value or performance. In effect, in the presence of

effective corporate governance structures, corporate insiders have a disincentive to pursue

their own opportunistic interest, as these good corporate structures serve as a deterrent or

disciplinary measure that guides the corporate dealings to maximize firm value (Eisenberg

et al., 1998;Epps and Cereola, 2008;Judge et al., 2003). This suggests that some

corporate governance structurespromote firm performance.

Although corporate governance is generally accepted to enhance the firm value, this is

done through two varying perspectives or theories. These two perspectives include the

shareholder perspective and the stakeholder perspective (Abdullah, 2004). While the

shareholder perspective has been the traditional view and of course the more dominant

view, the stakeholder theory only emerged recently. Corporate governance modeling has

closely followed the Anglo-American approach popularly referred to as the shareholder

model (Abdullah, 2004). The proponents of the shareholder perspective argue that

corporate governance structures should focus on the promotion of shareholders’ value

(return on equity [ROE]) because of the separation of management (control) and ownership

(shareholder), as managers may pursue their own interest at the expense of the interest of

shareholders (Keenan, 2004;John and Senbet, 1998;Jensen and Meckling, 1976). The

proponents of the stakeholder perspective on the other hand argue that corporate

governance structures should not focus on promoting the value of only the shareholder but

also on promoting the value of all (shareholders, employees, creditors, tax agencies,

society, government, etc.) who have a stake or interest in a firm. Following this, Aguilera

and Cuervo-Cazurra (2004) posited that corporate governance structures are there to

“encourage efficient and equal use of resources which requires accountability for the

stewardship of these resources”. Thus, its main aim is to align as closely as possible the

interests of individuals, corporationsand the society as a whole.

Given these perspectives to corporate governance, empirical studies have focused more

on the dominant perspective, which is the agency perspective (Mensah and Abor, 2014;

Abdullah, 2004;Keenan, 2004;Singh and Davidson, 2003;John and Senbet, 1998)

neglecting the stakeholder perspective to corporate governance. This is somewhat strange

as good corporate governanceshould not only serve the interest of the shareholder but also

help promote the value of the stakeholder. The literature on corporate governance barely

discusses which corporate governance structures promote or detract shareholder and

stakeholder value maximization goals. Hence, this study takes the advantage of the lack of

empirical studies especiallyin the context of Africa to explore and compare for the first time,

to the best of our knowledge, which corporate governance structures promote shareholder

and stakeholder value maximization in African banks. Given the low level of economic

growth and development in Africa, the importance of this study in African banks cannot be

overemphasized because the banking sector in most African countries are instrumental in

the advancement of economicgrowth and development through the pursuit of the firm value

maximization (including shareholder and stakeholder values). To do this, shareholder value

is represented as ROE, whereas stakeholder value is measured as return on assets (ROA).

The study focuses on banks for a number of reasons. First, data on banks are easily

accessible making it easy to undertake the study. Second, the literature (Tadesse, 2002)

suggests that banks facilitate economic growth and development in most countries, and

hence investigating corporate governance and value maximization may help to promote the

VOL. 18 NO. 2, 2018 jCORPORATE GOVERNANCE jPAGE 271