Corporate Governance among Banks Listed in the Philippine Stock Exchange

INTRODUCTION Asian central banks initiated corporate governance reforms among banks as an aftermath of the 1997 Asian Financial crisis. By 2008, when the global financial crisis set in, corporate governance reforms already in place among Philippine banks provided safety nets which minimized falling asset prices and losses. Since 2002, listed companies in the Philippines have been required to discuss their adoption of best practices in Corporate Governance in their annual reports on SEC Form 17-A submitted to the Securities and Exchange Commission (SEC). This paper evaluates corporate governance among banks listed in the Philippine Stock Exchange (PSE) from the period 2005-2009. Our main goal is to investigate the determinants of corporate governance and the dynamics of their relationship to corporate governance. Thus, we will test the following hypotheses: HYPOTHESES HI: Corporate governance (as proxied by insider ownership) has a significant relationship with an independent board of directors, bank size, return on assets (ROA), return on equity(ROE), earnings per share (EPS), age, and non performing loans ratio (NPL). H2: Corporate governance (as proxied by board size) has a significant relationship with an independent board of directors, bank size, return on assets (ROA), return on equity(ROE), earnings per share (EPS), age, and non performing loans ratio (NPL). LITERATURE REVIEW Jensen and Meckling (1976) agency theory discussed that agents or managers perform functions on behalf of shareholders. However, these agents or managers will prioritize maximizing his wealth ahead of the shareholders' value since his compensation is tied to managerial performance. Thus, Jensen and Meckling (1976) discussed that internal and external monitoring costs are incurred to minimize conflict of interest. As Elsayed (2007) cited Johnson et al. (1996), the board of directors' main functions are: "monitoring management actions, advising the CEO and getting external resources that are vital to build corporate capabilities (p. 1204). " Elsayed (2007) defined the total number of directors on the board as the measure of board size. El Mehdi (2007) showed that board size is positively related to corporate governance which means a larger board would have more directors to monitor agency problems, review management actions, bring greater opportunities. The presence of independent directors in the board enhance board governance, reduce financial statement fraud, increase transparency and disclosure, and protect minority shareholders. (Leung and Horwitz, 2004). However, El Mehdi cited Jensen (1993) that there is an upper limit to boards, which is eight directors, as more than this will affect group dynamics and board performance. On the other hand, El Mehdi (2007) and Barucci and Felini (2005) cited that there is a large literature establishing a negative relationship between board size and firm performance; see Hermalin and Weisbach (2001), Yermack (1996) and Barucci and Ceccacci (2005). Corporate governance literature uses two alternative approaches to measuring corporate performance. The first uses accounting measures of corporate performance. These include return on assets, return on equity and earnings per share. Elsayed (2007) presented that return on assets is net profit divided by total assets, which reflects operating results rather than capital structure decisions. The relationship between earnings and managerial shareholdings can be positive (Korczak and Korczak, 2009) or negative (Korczak and Korczak, 2009; Kuznetsov, Kapelyushnikov, Dyomina (2008) at higher levels of managerial shareholdings. Barucci and Felini (2005) studied the determinants for corporate governance in listed firms in the Italian stock exchange. These included balance sheet data, ownership structure, company performance and qualitative features. They concluded that companies with a large shareholder and/or large minority blockholders have poor governance and protection of shareholders. …