Abstract
Abstract
Abstract
Purpose:
The main purpose of this paper is to study the influence of Corporate Governance, Corporate Social
Responsibility, and Corporate-specific characteristics on the performance of Banking sector of
Pakistan.
Methods:
Results:
1. Introduction
Companies influence and are influenced by their external environment, so the company’s objectives
exceed profit-making and turn to value creation (Berman et al., 1999; Cremers, 2017). Thus, the
Corporate Governance (CG) characteristics, which dictate the relationship that the company maintains
with its stakeholders, are considered essential tools for the success of companies. Simultaneously, the
Corporate Social Responsibility (CSR) characteristics comprise the behaviors and actions that the
company takes voluntarily, promoting its stakeholders’ well-being. In this sense, corporate governance
protects shareholder interests and plays a key role in preserving and sustainable development of a
company (Srivastava et al., 2018).
Recent literature has shown that adopting corporate governance principles and practices is considered
an important determinant of the assessment of companies and, consequently, their performance levels
(Ting et al., 2019). There is a growing concern regarding social and corporate initiatives, providing
companies with a natural progression, focusing on improving the human dimension, preserving the
environment, and social awareness. In addition, currently, companies are increasingly involved in
plans whose objectives involve environmental, social, or governmental issues (Zhao et al., 2018). This
process benefits companies, allowing them to improve their performance (Rodriguez-Fernandez,
2016). There is still a long way to go in performance analysis considering societies’ social challenges.
Thus, this study arises from the need to expand the literature on the subject, namely The Banking
Sector of Pakistan, and aims to demonstrate how corporate governance, corporate social
responsibility, and company-specific characteristics influence performance. This analysis is made
from two different perspectives, analyzing both the view of managers and the view of potential
investors. This study contributes in different ways to the literature. First, the Banking Sector as a
whole is analyzed, given its geographic proximity and commercial and cultural relations; then, each
country is analyzed individually to better understand the differentiating characteristics in terms of
business performance.
Secondly, and to the best of our knowledge, this study is the first to analyze the different
characteristics of corporate governance and social responsibility for the Banking Sector, allowing us
to investigate the effect of these determinants in comparative terms for the country.
Thirdly, our study allows us to analyze the results from the different perspectives of managers and
potential investors, results that can be quite different, according to Vieira et al. (2019).
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2. Literature Review
3
The Audit Committee in the banking sector is a subcommittee of the bank's board of directors
comprised of independent directors who are not involved in the bank's day-to-day operations.
This committee is responsible for providing independent oversight and monitoring of the bank's
financial reporting and auditing processes, risk management, and compliance with applicable
laws and regulations.
The audit committee, quite common in the Anglo-Saxon model, is ended of a part of the board of
directors, who are non-executive directors. This committee acts as a supervisory body. Its functions
include obtaining internal information, reporting, and supervising so that information disclosed to
stakeholders is presented fairly and truthfully (Dakhlallh et al., 2020; Zhou et al., 2018. Concerning
studies that analyze the impact of the audit committee on the companies performance, there are
uncertain results. Some studies verify a positive effect on performance measured by ROA or Tobin’s
Q since the audit committee will promote greater internal control, reduce risks and fraud in
organizations, increasing the performance of companies (e.g., Dakhlallh et al., 2020; Fauzi et al.,
2017; Hussein Mohammed et al., 2019). However, some authors report a negative relationship
between these variables, such as Hassan et al. (2016) and Puni and Anlesinya (2020), justifying this
relationship with a possible lack of independence and specialized knowledge of its members, or by the
fact that companies only fulfill the requirement of having an audit committee (Zhou et al., 2018).
that a portion of the CEO's remuneration is directly tied to the bank's efforts and achievements
in social and environmental responsibility. This approach is designed to align the CEO's
financial incentives with the bank's commitment to CSR, promoting ethical and sustainable
business practices.
The CEO’s compensation is the total amounts earned in the quality of salary, bonuses, compensation
through shares, and other personal benefits (Hoi et al., 2019). This remuneration can positively or
negatively affect the performance of companies. Thus, higher CEO compensation can lead to more
ethical conduct, improving organizations’ performance (Bebchuk et al., 2002; Bertrand and
Mullainathan, 2003). In addition, Edmans et al. (2017) and Elsayed and Elbardan (2018) argue that a
way to align managers’ interests with shareholders’ interests involves associating remuneration with
performance, in line with agency theory. Also, Manna et al. (2016) and Rehman et al. (2021) find a
positive effect between remuneration and company performance, as the highest-paid CEO may be
more motivated to achieve corporate results. However, high remunerations can mean agency problems
that cause a decrease in business performance or CEO do not satisfy their duties (Carter et al., 2016).
Furthermore, executive members with high salaries may not be sufficiently motivated to increase
market performance, as measured by Tobin’s Q (Smirnova and Zavertiaeva, 2017). These authors also
verify that only bonuses earned by the CEO increase ROA.
competitiveness in the market (Gupta and Shaw, 2014) Thus, social expenses can have a positive or
negative effect on business performance. On the one hand, higher remuneration can translate into
greater employee motivation and effort, greater productivity, lower agency costs, greater business
innovation, consequently leading to greater corporate performance (e.g., Cao and Rees, 2020; Edmans
et al., 2017; Iverson and Zatzick, 2011; Neves et al., 2021; Wei et al., 2020). However, employees
may behave contrary to the organization’s interests, acting according to their own interests to obtain
higher remuneration, which can lead to lower performances (Gupta and Shaw, 2014). Also, Kim and
Jang (2020) show that in the short term, the effect of personnel expenses and performance is negative,
but, in the long term, this relationship could be positive.
2.3.2. Leverage:
In the banking sector, "leverage" refers to the use of borrowed funds or debt to increase the
potential return on investment. It represents the ratio of a bank's total debt or liabilities to its
equity capital. Leverage is a common financial practice that banks employ to amplify their
profits, but it also increases the level of risk and potential losses.
Leverage provides evidence about a company’s dependence on third parties and may reveal its
capacity to generate additional returns and maximize business performance. According to Alshatti
(2016), leverage positively affects the banks performance, suggesting that banks that can manage their
debt efficiently can have better performances in the future, mainly for tax reasons. In agreement with
previous results, Bărbută-Misu et al. (2019) and Neves, Henriques, et al. (2021) confirm the existence
of a positive relationship between leverage and performance. On the other hand, Zeitun and Saleh
(2015) show that leverage has a negative effect on business performance. Similarly, Pais and Gama
(2015), using a sample of Portuguese non-financial companies, attested to a significantly negative
relationship between the level of financial debt and performance, measured through ROA. Miralles-
Marcelo et al. (2014.
"In the context of the banking sector in Pakistan, corporate governance is defined as, 'the
comprehensive system of principles, structures, and practices that govern the operations,
decision-making, and accountability of financial institutions' (Khan, 2023)."
Corporate governance in the Pakistan banking sector is designed to protect the interests of
stakeholders, maintain financial stability, and foster public confidence in the banking system. It
includes the composition and role of the board of directors, risk management practices, regulatory
compliance, ethical behavior, and accountability mechanisms, all of which collectively contribute to
responsible and sound banking operations within the Pakistan.
Dependent Variables
3.1.3 Corporate Performance:
“The assessment of an organization's overall effectiveness, efficiency, and success in
achieving its strategic objectives and fulfilling its mission”. (Khan,2023)
It is measured through a combination of key performance indicators (KPIs) and metrics in
various dimensions.
Corporate performance refers to the overall effectiveness and efficiency of a corporation or
organization in achieving its goals, objectives, and mission. It encompasses a wide range of
activities, measures, and outcomes that determine how well a company or entity is
functioning. Corporate performance is often assessed in multiple dimensions, including
financial, operational, strategic, and social aspects.
Mediating Variables
3.1.4 Ethical Behaviour:
Ethical behavior in the banking sector is the consistent adherence to a well-defined set of moral
and professional principles, values, and standards that guide the actions, decisions, and
practices of banking professionals and institutions. (Khan,2023)
Operationally, ethical behaviour in this sector can be evaluated through the following specific and
measurable criteria:
Moderating Variables
3.1.5 Industry Characteristics:
Industry characteristics in the banking sector refer to the specific attributes and traits that
define the environment, structure, and operations of the banking industry as a whole.
(Khan,2023)
These characteristics help differentiate the banking sector from other sectors and provide insights into
its unique features and dynamics.
Market Concentration
Regulatory Environment
Banking Products and Services
Financial Inclusion
Technology and Innovation
Credit Risk and Asset Quality
Efficiency and Productivity
Risk Management
Corporate Social Responsibility (CSR)
Profitability and Financial Performance
9
Corporate Ethical
Governance Behaviour
Corporate
Performance
Corporate Social
Responsibility
Industry
Characteristics
10
CG EB
CSR CP
IC
3.3.1 Hypothesis
Ho Corporate Governance has no impact on Corporate Performance.
H1: Corporate Governance has significant impact on Corporate Performance.
HO: Corporate social responsibility has no effect on Corporate Governance
H2: Corporate social responsibility has remarkable effect on Corporate Governance.
Ho: Corporate Governance and Corporate social responsibility has no effect on Corporate
performance.
H3: Corporate Governance and Corporate social responsibility has notable effect on Corporate
performance.
Ho: Ethical behavior has serious effect on Corporate Performance.