Today corporate governance is complex and changing, consisting of laws, regulation, politics, and cord of ethics. Therefore, corporate governance will ensure common standards of behavior to all banking institutions in order to enhance public confidence and contribute towards strengthening the stability of financial institutions (Central Bank, 2020). Mitigating residual losses is one of the goals of effective corporate governance (Safari et al., 2015). Corporate governance helps in better governing the corporation and to reach the desired objectives, (Khan, 2017). The implementation of corporate governance is the responsibility of the board of directors. Dah & Hurst (2016) emphasized the importance of internal directors in terms of having a positive influence on the company’s success. A large number of public companies failed during the 1980‟s due to large-scale fraud by directors. It has been reduced to some extent by financial reports and auditing. Many people thought that company directors observed accounting standards as the set of rules to be circumvented. A firm’s corporate governance system is a crucial system for controlling the agency problem. The method contains a monitoring provision that owners may utilize to verify that executives make decisions that are in the best interests of the owners and maximize company value (Kraakman et al., 2004).
Internal attributes of corporate governance
These attributes are denoted as board size, board meeting frequency, audit committee size, director ownership and, outside directors.
The board of directors is described as the governing body to whom shareholders assign the task of supervising, compensating, and replacing management, as well as authorizing important strategic projects (Alareeni, 2018).It is regarded as an essential component of the corporate governance process. Furthermore, it is regarded as “the primary internal method for reducing agency concerns, whether between managers and shareholders or between minority and majority shareholders” (Alareeni, 2018). According to Ajanthan et al. (2013), larger boards are better for organizations because
they have expert knowledge and that assigns makes better decisions, and reduces the power of the CEO. Mishra & Kapil (2018) analyzed the data of 391 listed companies in India empirical findings indicate that there is a positive relationship between board size and firm performance. However, some authors argued that the smaller the board size of the company the better communication and coordination among its members (Azeez, 2015; Khan et al., 2020).Therefore, there will be a positive or negative relationship between board size and firm.
Board meeting frequency
The frequency of board meetings is an essential board characteristic feature because it reflects the board of directors’ ability to control the manager’s activities; it also ensure that shareholders’ interests are protected (Ntim et al., 2017). Many studies have shown that the number of board meetings is related to company performance because the frequency of meetings allows the board of directors to perform larger influence. Regular meetings provide shareholders a sense of security and align the manager’s actions with the objective of wealth maximization. Regular meetings might also improve the relationship between the board of directors and the shareholders, leading to greater dedication and improved business performance (Ntim et al., 2017; Puni & Anlesinya, 2020).
Other research, on the other hand, argues that the frequency of board meetings is inversely related to financial performance. AL-sartawi (2018) in the case of GCC countries, such a negative relation has been verified among Islamic banks; board meetings are dominated by procedures. The majority of the board of directors, particularly independent directors, spend time in meetings to have a better understanding of the company’s problems. As a result, meeting effectiveness declines, and decreases firm performance.
Audit committee size
Danoshana & Ravivathani (2019) have analyzed the listed financial Institutions in Sri Lanka for the period 2008 to 2012 finds audit Committee is positively related to firm’s performance. Tornyeva & Wereko (2012) believes that the audit committee’s size influences the firm’s performance improvement, and they discover a significant positive link between the audit committee’s size and the firm’s performance. The explanation for this might be that a larger audit committee with a diverse range of experiences and expertise increases the efficacy of the committee’s monitoring role, resulting in improved company performance. On the other hand, Some research contradicts the idea that a larger audit committee is related to better financial performance. Romano et al. (2012) argue that the audit committee’s size has no influence on the firm’s performance. Moreover, According to Al-Matari et al (2012) analyzed the performance of the Saudi companies in 2010 and find the size of the audit committee has a significant negative relationship with financial performance. As a result, the size of the audit committee may have a positive or negative impact on the firm ’s financial performance.
Bhagat & Bolton (2013) find the significant positive effect of director ownership on financial performance. There was a significant positive relationship between director ownership and accounting and market-based firm performance, according to the (Kao, Mao Feng, 2018).Rashid (2020) research examined at 527 annual reports from Bangladesh’s listed firms from 2015 to 2017 and the findings revealed that foreign ownership and director ownership had a significant and positive impact on the performance of both accounting and market-based firms.
Bhagat et al. (2008) published a study that emphasizes the importance of common stock owned by corporate board members (director ownership) in the present corporate governance discussion. They identify significant positive relationship between total director ownership and financial performance as well as effective management supervision.
Outside directors’ worth is related to their capacity to assess a company’s performance objectively. Inside directors have in-depth understanding of a company’s operations, but outside directors can provide both experience and impartiality to the process of assessing management’ decision. Thus, outside directors can monitor a firm more closely and take appropriate governance actions; It’s possible that some senior executives may be fired. The role of outside directors as monitors has been validated by several empirical studies. Outside directorship is positively related with firm performance (Gupta et al., 2008). Puni & Anlesinya (2020) have shown that the significant benefit of having both internal and outside directors on a corporate board suggests that having both members on a board can help improve a company’s financial performance. Outside directors, or board members who have no ties to management, are essential to improving company performance by using their experience and skills to improve boardroom decision-making, accountability, and voluntary transparency. According to the results, a successful board composition should contain a combination of within and outside directors.
Ahmed Sheikh et al. (2013) found that the performance of the company is negatively affected by the outside director. The negative relationship might be due to the low presence of independent directors on the boards of Pakistani companies, which could encourage managers to expropriate the company’s resources for personal gain, lowering performance.
There are many measures of firm performance such as accounting-based measures and market-based measures. Accounting-based measures are consist of return on assets, return on equity and earnings per share (Khan et al., 2020). According to Azeez (2015)
, small boards are associated with a higher company performance through monitored closely management.. Peters & Bagshaw (2014) reported the Return on Equity and Return on Assets are two significant accounting indicators of a company’s financial performance. The Return on Equity is important accounting indicators of a company’s financial success, and it is the focus of this study.
Return on Equity
Many economists believe that return on equity (ROE) is the most important metric for evaluating a company’s success. There are two approaches to increase profits while maintaining the same level of equity: either maximize earnings while maintaining the same level of equity or lower the equity-to-total-asset ratio while maintaining the same level of net profit (Oana Pintea et al., 2020).The fundamental aim of a firm’s operation is to generate profits (income) for the benefit of the investors. Epps & Cereola, (2008)
,shows investors the profit earned from invested by the shareholders. This will be calculated as the total net profit of the bank divided by total shareholder equity (Khan, 2017). Jeon & Miller (2006) found out that bank financial performance is the bank profitability in banking. The return on equity is calculated by dividing the after-tax return on equity by the book value of equity. In addition, performance may also refer to the share price, profitability or the present valuation of a company.