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THE IMPACT OF CORPORATE GOVERNANCE ON THE PERFORMANCE OF

JORDANIAN BANKS (Al-Manaseer, Al-Hindawi, Al-Dahiyat, & Sartawi, 2012)
Introduction
The issue of corporate governance has become obverse and centre of the agenda for both
business leaders and regulators all over the world, following the global financial crisis. The crisis
has provided many illustrations of the collapse of corporate governance and, consequently,
international regulators are hard at work to influence appropriate regulatory controls. Thus, the
role of effective corporate governance is of massive importance for the society as whole. First, it
encourages the efficient use of scarce resources within the organization and the economy.
Second, it makes the resources flow to the most efficient sectors or entities. Third, it helps the
mangers to remain focused on improving performance. Fourth, it provides a tool of choosing the
best executive to control the scarce resources. Finally, it forces the organization to comply with
the rules, regulations and prospects of society.

This paper investigates empirically the impact of corporate governance dimensions (Board Size,
Board Composition, Chief Executive Officer (CEO) Status, and Foreign Ownership) on the
performance of Jordanian Banks.

The writers (Al-Manaseer, Al-Hindawi, Al-Dahiyat, & Sartawi, 2012) found negative and
statistically significant relationship between Jordanian banks' performance (ROE and EPS) and
BZ which is consistent with the hypothesis that bank's board with too many directors face
considerable problems of coordination, communication, and decision-making, as well as the risk
of excessive CEO control. This result is supported by empirical evidence from non-financial
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firms which confirms that the problems of oversized boards outweigh their advantages
(Yermack, 1996). Similarly, Mak and Yuanto (2003) found that firm valuation is highest when
board size is small using sample of firms in Malaysia and Singapore. Mak and Kusnadi (2005)
also report that small size boards are positively related to high firm performance. It was also
observed that there is a positive relation between the proportion of outsiders (NBM) and
performance. This result supports the argument that adding outside directors to the board
improves the supervision of management and reduces the conflict of interest among
stakeholders, as predicted by the hypothesis that if a bank appoints a new outside director with
advisory capabilities, strategic decisions should improve since the counseling skills of the
directors complement those of the CEO. This result is supported by many empirical studies that
find better stock returns and operating performance when outside directors hold a significant
number of board seats (Cornett et al., 2008). Moreover, Baysinger and Butler (1985) found that
companies perform better if boards include more outsiders. Overall, this result may indicate that
external directors complement and cooperate with the CEO in strategic issues in the Jordanian
banking industry.

The CEO variable has a negative and statistically significant impact on the PM. This result is in
line with Anderson and Anthony (1986) suggestion of the combination of chairperson and CEO
in order to avoid ambiguity in responsibilities. The result of the relationship between the foreign
ownership and Jordanian banks' performance is clear with the four performance proxies -positive
and significant. This may be due to the superior access to capital markets or technologies.
Finally, the explanatory power of the four models, R2 values, is 0.17, 0.144, 0.202 and 0.677
respectively. This indicates that 17%, 14%, 20% and 68% of the variation in the Jordanian banks
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return on assets and return on equity, profit margin and earnings per share respectively, can be
explained by the explanatory variables in each model.

Critiques
This study examined the relationship that exists between bank performance, using four proxies,
(return on equity, return on assets, profit margin, and earnings per share) and four corporate
governance mechanisms (board size, board composition, chief executive status and foreign
ownership). Using pooled data research method, this study examined the empirical relation
between Jordanian banks' performance measures and corporate governance mechanisms for 15
banks quoted on the ASE for the years 2007-2009. The study reveals positive relationship
between the number of outside board members and the foreign ownership and Jordanian banks
performance. On the other hand, the study finds negative relationship between the board size and
the separation of the role of CEO and chairman and Jordanian banks performance. Finally, the
study finds that banks benefit from large size in offering services more than granting loans.

However as with any corporate governance study, this study is subject to some critiques. First,
employing proxies for actual corporate governance mechanisms and bank performance outcomes
may not accurately capture the actual mechanisms or outcomes experienced by banks in the
financial marketplace. Second, due to the fact that the implementation of banks corporate
governance regulations has started in Jordan from 2007 the study is constrained to the 2007-2009
financial data. This limits the ability to generalize results to other time period.


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References
Anderson, C. A. & Anthony, R. N. (1986). The New Corporate Directors, New York: John
Wiley and Sons.
Baysinger, B. & Butler, H. (1985). Corporate governance and the board of directors:
performance effects of changes in board composition, Journal of Law, Economics and
Organization, Vol 1, pp 101- 124.
Cornett, M. M., Marcus, A. J. & Tehranian, H. (2008). Corporate governance and pay for
performance: the impact of earnings management, Journal of Financial Economics, Vol.
87, PP. 357373.
Al-Manaseer, M. F., Al-Hindawi, R. M., Al-Dahiyat, M. A. & Sartawi, I. I. (2012). The Impact
of Corporate Governance on the Performance of Jordanian Banks, European Journal of
Scientific Research, ISSN 1450-216X Vol.67 No.3 (2012), pp. 349-359
Mak, Y. T. & Kusnadi, Y. (2005). Size really matters: further evidence on the negative
relationship between board size and firm value, Pacific- Basin Finance Journal, Vol 13,
pp 301- 318.
Mak, Y. T. & Yuanto, K. (2003). Board Size Really Matters: Further Evidence on the Negative
Relationship Between Board Size and Firm Value, Pulses by Singapore Stock Exchange.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors,
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