East Meets West? Board Characteristics in an Emerging Market: Evidence from Turkish Banks

• Author: Eralp Bektas,Turhan Kaymak
• Date: 01 November 2008
• DOI: http://doi.org/10.1111/j.1467-8683.2008.00713.x
• Published date: 01 November 2008

East Meets West? Board Characteristics in an

Emerging Market: Evidence from Turkish Banks

Turhan Kaymak* and Eralp Bektas

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: The aim of this study is to uncover whether prescribed “western style” governance practices

surface in the characteristics of board of directors in Turkish banks, and to see if these characteristics inf‌luence f‌irm

performance. Turkey is an emerging market drawing large amounts of foreign investment but board composition issues

have rarely been analyzed.

Research Findings/Results: This study investigates the association of board independence, CEO duality, board size, and

board tenure with bank performance in Turkey. These relationships are examined for all 27 Turkish banks operating in the

market between the years 2001–2004. Our f‌indings suggest that the presence of insiders has a positive impact on return on

assets, while duality and board tenure are negatively associated with performance.

Theoretical Implications: Our study shows that Turkish banks are following a number of recommended governance

practices, but the prevalence of some arrangements may exacerbate principal-principal conf‌lict. Whether this holds in other

more closed sectors of the economy is an area worthy of further investigation.

Practical Implications: The presence of duality in the form of duly empowered members/executive directors is very

problematic, leading to potential principal-principal conf‌lict. Strategic investors and portfolio managers should challenge

this arrangement before making sizable outlays in the Turkish f‌inancial sector.

Keywords: Corporate Governance, Board of Directors, Corporate Performance, Banking, Central and Eastern Europe

INTRODUCTION

Globalization, although mostly associated with the

movement of capital and products,has also accelerated

the transfer of values, ideas, and business practices around

the world. Corporate governance issues gained a worldwide

audience in 2001 with the spectacular collapse of Enron, and

suddenly the board of directors of many underperforming

f‌irms were reluctantly thrust into the spotlight. However,

the majority of the ensuing international prescriptions and

recommendations concerning corporate governance prac-

tices have had a distinct Anglo-American f‌lavor, ref‌lecting

those nations’ political, legal, and social value systems.

These include the now amended Sarbanes-Oxley Act of 2002

and numerous European Union (EU) Commission Recom-

mendations (Staikouras, Staikouras, and Agoraki, 2007).

Accordingly, the integrationof the world economy is propel-

ling governments and companies alike to improve corporate

accountability, mainly with these standards in mind. But

scholars like Jaeger (1990) and Triandis (1994) have elo-

quently discussed and critiqued the uncritical application of

western managerial practices in countries of different stages

of economic, legal, and social development, maintainingthat

national cultures may inhibit their effective employment.

Indeed, the great bulk of research on corporate gover-

nance has been conducted in western settings, mostly based

on the pioneering work of Berle and Means (1932) who

championed the theory of separation of ownership and

control. With the advent of the modern corporation, we now

have large companies that pool the wealth of small and

diffuse shareholders who in turn delegate daily business

activities and decisions to professional managers. Herein lies

a problem – a few individuals (i.e., the managers or agents

of the principals) control the f‌irm and benef‌it from informa-

tion asymmetries, which may cause them to expropriate

shareholder value, leading to conf‌lict with the owners/

shareholders. How will the shareholders (i.e., the principals)

monitor the activities of the managers to make sure that

wealth maximization is being pursued? The solution lays

either with the market in the form of hostile takeovers (e.g.,

*Address for correspondence: Business Department,Faculty of Business and Econom-

ics, Eastern Mediterranean University, North Cyprus, via Mersin 10 Turkey. Tel:

90-392-630-2745; Fax: 90-392-365-1017; Email: turhan.kaymak@emu.edu.tr

550 CORPORATE GOVERNANCE

Volume 16 Number 6 November 2008 © 2008 TheAuthors

Journal compilation © 2008 BlackwellPublishing Ltd

doi:10.1111/j.1467-8683.2008.00713.x