Relationship between Corporate Governance and Firm Performance: GCC Banking Sector Perspective

This paper evaluates existing studies on the relationship of corporate governance with firm performance in different regions and address the need for similar analysis for the Gulf Coperation Council (GCC) sector. The banking sector comprises the conventional and Islamic banks in the GCC sector and is important due to their ability to bring stability to this region.

Corporate Governance
A critical review of relationship between corporate governance and firm performance: GCC banking
sector perspective
Tamanna Abdul Rahman Dalwai Rohaida Basiruddin Siti Zaleha Abdul Rasid
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Tamanna Abdul Rahman Dalwai Rohaida Basiruddin Siti Zaleha Abdul Rasid , (2015),"A critical review of relationship
between corporate governance and firm performance: GCC banking sector perspective", Corporate Governance, Vol. 15 Iss
1 pp. 18 - 30
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A critical review of relationship between
corporate governance and firm
performance: GCC banking sector
perspective
Tamanna Abdul Rahman Dalwai, Rohaida Basiruddin and Siti Zaleha Abdul Rasid
Tamanna Abdul Rahman
Dalwai, Rohaida
Basiruddin and Siti
Zaleha Abdul Rasid is a
Senior Lecturer all are
based at International
Business School,
Universiti Teknologi
Malaysia, Kuala Lumpur,
Malaysia.
Abstract
Purpose – The purpose of this paper is to evaluate existing studies on the relationship of corporate
governance with firm performance in different regions and address the need for similar analysis for
the Gulf Coperation Council (GCC) sector. The banking sector comprises the conventional and
Islamic banks in the GCC sector and is important due to their ability to bring stability to this region.
Existing studies that measure the relationship of GCC sector conventional banks and firm
performance are limited. This study proposes a need for future research on corporate governance
in the GCC region.
Design/methodology/approach – This paper will review and analyze the different empirical and
theoretical contributions in establishing the relationship between corporate governance and firm
performance.
Findings – This paper will create a focus for future research of measuring the impact of corporate
governance mechanism on firm performance. The regulators will be encouraged to focus on more
research studies for the GCC sector development in the field of corporate governance of the banking
sector.
Research limitations/implications – The existing studies are valid and practicable for the region
under study, and the results need not be applicable for other business environments. In addition,
the evolving business and economic environment have always brought about inconsistent
conclusions; thus, the period of study can always give varied results.
Practical implications – The analysis undertaken in this paper will address the literature gaps for the
GCC banking sector and play an instrumental role for future studies by theoreticians and regulators.
Originality/value – This paper identifies the literature gaps for the GCC region and analyses the most
applicable existing studies that can be useful for the banking sector corporate governance
improvement. This paper will create opportunities for the future researchers.
Keywords Financial performance, Corporate governance, Board of directors, Shareholders,
Audit committees, Chairmen
Paper type Literature review
Introduction
The global financial crisis of 2007 had created ripples in the faith of banking sector. The
reason for this crisis was attributed to financial sectors self – interest behavior. According
to Howard (1997), the term “tragedy of maximisation” was introduced when the firms act in
their self-interest and eventually lead to misuse of shareholder funds. For free markets to
work efficiently, it is important to have elements of accountability, ethics, responsibility and
transparency ( Friedman and Friedman, 2010).
Received 24 April 2013
Revised 24 April 2013
Accepted 1 October 2013
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Corporate governance has received considerable attention over the past few decades to
instil confidence in the stakeholders of organisations. But it is not enough to view corporate
governance as a whole but at different levels of importance and applicability. For example,
several authors suggest that corporate governance of financial sector is different than the
non-financial sector because of its opaque nature and heavy regulation (Levine, 2004) .
Some important studies have been undertaken to measure the impact on the
performance of banks during the financial crisis. For example, Qu et al. (2012)
investigated empirically the performance of banks in the BRIC countries (comprising
Brazil, Russia, India and China) during the financial crisis. The period under study was
from 2003 to 2010, and it was found that, from 2007 to 2008, there was a significant
decline in the banking efficiency due to the crisis. They suggested that in such
countries, increase of competition and regulations would improve the banking
efficiency. Similarly when Chan-Lau et al. (2012) studied the impact of the crisis on the
European banks, it was suggested that a stronger capital base and reliance on
deposits would help them cope with any major financial crisis.
Such studies have been the focus of many researchers in developed countries and
many emerging countries as well, but the Gulf Coperation Council (GCC) financial
sector has had inadequate attention. There has been a dearth of research in the GCC
region for the corporate governance practices of financial and non-financial sector
firms. This paper presents the need for future research of corporate governance
mechanisms and its relationship with the firm performance of GCC incorporated banks.
The GCC comprises six countries: Bahrain, Kingdom of Saudi Arabia, Kuwait, Oman,
Qatar and United Arab Emirates (UAE). The growth of this region has been
predominantly from revenues generated through oil reserves. Over the past decade,
this region has diversified its sources of revenue from construction, retail,
manufacturing and tourism sectors. Accenture (2011) conducted a study of the GCC
region that highlights some of its prominent features making it stand out in comparison
to the other emerging and developed markets. The GCC region was able to emerge
from the global financial crisis relatively unscathed due to its policies and regional
development activities. It was noticed that the growth of the GCC region was at par with
the other emerging nation over the past 10 years which is around 5-6 per cent. This
growth has been faster than some of the advanced economies itself. The growth rates
in this region is expected to get stimulus from the government incentives to diversify
in the industrial base, infrastructure and housing investments, thus reducing
dependencies on the revenues generated from the oil and gas sector. The
demographic profile of this region is also an attractive point, as most of the population
is very young. The Accenture group conducted a survey of 47 banks in the GCC region
and found that there is an anticipation of more stricter regulations, more competitive
markets and skills’ shortage by 2015. While the regulations are getting stricter around
the world, the GCC banks are expecting to focus on liquidity management and
compliance with the regulations set by their central banks. One of the most notable
outcomes of this survey was the expectation of changing business models because of
the requirement of stricter corporate governance and risk management requirements.
The GCC has six countries but seven stock exchanges. All countries have one stock
exchange except for UAE that has two stock exchanges, Abu Dhabi Stock Exchange
and Dubai Stock Exchange. For the second quarter results declared at the end of June
2012, it was found that Saudi Arabia and Qatar banks were dominating the growth in the
region. Saudi Arabia banks accounted for 36 per cent and Qatar banks accounted for
20 per cent of the total GCC profit. Kuwait, Bahrain and Dubai witnessed a negative
growth on a year-on-year basis. Thus, four markets witnessed a positive growth on a
year-on-year basis. As future prospects of the region suggests that banks will have to
expand beyond the region and is also showing signs of recovery from the crisis ( Global
Banking and Finance Review, 2013).
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The banks of the GCC region have shown considerable resistance during the period of
the crisis and have shown an overall improvement. There have been many reasons
because of which the GCC banks have shown resilience during this period, but the role
of corporate governance and its impact has not been investigated. First, the paper
emphasizes the importance of corporate governance mechanisms. Second, there will
be a review of the most recent research papers on the relationship between corporate
governance mechanisms and firm performance around the world. Third, a review of the
limited research on GCC sector corporate governance practices will be presented.
Finally, the gaps in the existing literature are discussed to present a future course of
focus in the GCC region corporate governance practices.
Importance of corporate governance mechanisms
Corporate governance is a regulatory activity that is enforced through different internal
and external agencies to resolve the agency conflicts and protect the stakeholder
interests of organisations. Corporate governance ensures that firms are run in a
responsible and accountable manner that enhances the overall performance.
Becht et al. (2002) has suggested that the rising interest in corporate governance can
be attributed to five reasons which are:
1. worldwide privatization wave;
2. reforms in pension fund and growth in private savings;
3. the 1980’s takeover wave;
4. deregulation and integration of the capital markets world-wide; and
5. crises.
But corporate governance is not viewed in the same light for financial firms or
non-financial firms. Several studies suggest that because of the nature of financial firms,
the corporate governance mechanisms have to be applied differently. According to
Myers and Raghuram (1998), corporate governance of banks face challenges because
of the features of banks such as tradable assets, changing risk profile of banks and
structuring of assets in a way that conceal risks from outsiders. Kieff and Paredes
(2010) discussed three major problems with the banking sector. First, banks have to
maintain a deposit insurance system to protect the depositors because of the tendency
of continuous lending. Second, banks face several risks such as credit risk, operational
risk and market risk. Finally, the risk of the banks is not diversified but concentric in
nature.
As the banks face unique risks and are different in their business models, the nature of
corporate governance also needs to be customised at the micro and macro level.
Because of the global financial crisis, the corporate governance mechanism such as
executive compensation was a contributory factor to the banking crisis rather than a
regulatory one. For example, according to Turner (2009), the financial crisis in the
banking structures was because of the pay structures of the directors. The directors
focussed more on short-term goals and overlooked the long-term impact of their
decisions. Bebchuk and Spamann (2010) found that the option-based executive
compensation inculcated a risk behaviour in the managers and thus had an
unfavourable impact on the banks’ long-term goals and profitability.
The corporate governance mechanisms are classified into internal and external
mechanisms (Bushman and Smith, 2001; Cremers and Nair, 2005). The internal
mechanisms comprise ownership structure, board of directors, executive
compensation, audit committees and financial disclosures. The external mechanisms
comprise market for corporate control, managerial labour markets, proxy fights,
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product market competition and legal infrastructure. There are other classifications as
well to the corporate governance mechanisms.
The importance of corporate governance mechanisms are addressed by various
studies in different countries. It has always been a growing research interest to measure
the corporate governance mechanism impact on firm performance. It was found that
banks as the main blockholders of firms can actually enhance the market to book value
of equity in Germany ( Gorton and Schmid, 2000). Halioui and Jerbi (2012) investigated
the impact of blockholders on earnings management practices in the frontier market of
Tunisia. The study suggests that blockholders play a monitoring role and can also
engage in practices to force managers in earnings management practices. Kang and
Kim (2012) suggest that non-controlling large blockholders played an active role in
corporate governance of the firms in China. They also helped to improve the market
performance for state-owned enterprises. Laeven and Levine (2008) further suggest
that firms with multiple large blockholders are found to have a higher Tobin Q ratio.
The board size is found to have a positive relationship with firm performance in large
Australian companies (Kiel and Nicholson, 2003), whereas in Thailand, a negative
relationship was found between the board size and banks firm performance measured
by risk of equity (ROE) and return on assets (ROA) (Pathan et al., 2008). Board
expertise is another mechanism that is crucial for the effective firm performance. Christy
et al. (2009) report that Australian firms have a lower market ROE when a higher
percentage of directors have financial qualifications. Ozkan (2011) concluded that chief
executive officer (CEO) pay is not effectively linked to firm performance in the UK in
comparison to the US firms. But the larger firms in the UK were able to attract good
talent by offering higher CEO compensation.
Thus, it is important to understand the impact of corporate governance mechanisms.
The mechanism could work best for certain firms, or specific environment or even
specific time periods. There should be a continuous review of how to strengthen the
mechanisms to influence the self-interested managers for aligning with the stakeholder
interests. Unless researchers do not take an investigative role, it is impossible to find
the future suggestions that benefit and protect the stakeholders.
Existing studies of corporate governance around the world
There are several studies made around the world which are country-specific or
cross-boarder to examine the impact of corporate governance on firm performance.
These research studies make valuable contributions to the literature of corporate
governance, as they given an insight on the impact of firm performance. It also
encourages future developments in the topic of corporate governance and increases
regulatory pressures on firms for successful compliance.
Kato and Kubo (2006) found a positive relationship between CEO compensation and
firm performance measure of ROA in listed and non-listed firms of Japan.
Dahya et al. (2006) used the two measures of independent directors and dominant
shareholders to examine its impact on firm values. The study included 799 firms from 22
countries. Firms from Finland, South Asia countries and USA showed that larger boards
were associated with lower firm values. Countries that had high legal scores and
dominant shareholders translated higher Tobin Q ratios for the firms.
Switzer and Tang (2009) investigated the impact of corporate governance mechanisms
of small cap firm value in the USA. The sample consisted of 245 firms for a period of
2000-2004. A negative relationship was found as an impact of leverage and board size
on the firm value. Whereas when the CEO compensation structures are linked to the
performance, the firm performance increases.
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Praptiningsih (2009) investigated the impact of corporate governance mechanisms of
Asian banks (Indonesia, Thailand, Philippines and Malaysia) on firm performance. This
study used data from 2003 to 2007. It was found that foreign ownership was negatively
related to firm performance. The CEO duality mechanism was the only that explained
the relationship better with firm performance.
Babatunde and Olaniran (2009) did an empirical investigation of the relationship
between the corporate governance mechanisms and firm performance in Nigeria. The
listed manufacturing firms were included in the data. It was found that the mechanisms
of board size, block shareholders, leverage and firm size had a positive relationship
with the firm performance indicator of Tobin Q.
Guo and Kumara (2012) studied the impact of corporate governance mechanisms on
non-financial firms in Sri Lanka. There was a marginal negative relationship between
board size and proportion of non executive directors on firm value. An insignificant
impact on firm value was associated with directors’ shareholding and CEO duality.
Existing studies of corporate governance for the GCC sector
There has been some research on corporate governance for the GCC sector which are
analysed in this section. The research of corporate governance has either been done
country-specific or cross-country. Both types of research have been useful to gain
some insight on the practices of corporate governance in this region.
Research of corporate governance practices in Bahrain
Hussain and Mallin (2002) made important contributions to the literature of corporate
governance in Bahrain. With the increase of importance of corporate governance
practices in the developing countries, the progress of the same was being analysed in
Bahrain. The research used a survey methodology, and feedback was collected from
all companies listed on the Bahrain Stock Exchange Market. Companies were covered
from the banking, investment, insurance, services, industrial and hotel and tourism
sectors. Out of 33 companies that were approached for the questionnaire, 21
completed the responses for the same which was a 55 per cent response rate. It was
found that certain good practices of international corporate governance were observed
in Bahrain. The company boards were dominated by non-executive directors, and there
exists a separation in the roles of CEO and Chair. The nominations of these directors
were not transparent, and they are considered as more established. The companies
were found to have risk management control and internal audit department in place.
Hussain and Mallin (2003) followed-up their research on corporate governance
practices in Bahrain in the following year to analyse the board dynamics in the country.
Data were collected through questionnaires in 2002 that was administered to 35
companies but received only 15 responses. The questionnaires response rate from was
highest from the investment sector of 92 and 0 per cent from the industrial sector. The
study also conducted interviews with few prominent boards of directors, Bahrain
Monetary Agency and Ministry of Commerce and Industry in Bahrain. Overall analysis
suggests that the non-executive directors are nominated for a term of three years if they
have the relevant experience, skills and reputation. The companies do not have a
nomination committee, so the non-executive directors are appointed by board of
directors or by major shareholders. Most companies had an audit committee and
remuneration committee in place. It is interesting to note that during the period of this
study, Bahrain did not have a corporate governance code in place.
Research of corporate governance practices in Kuwait
Al-Shammari and Al-Sultan (2010) examined the relationship of voluntary disclosures
and corporate governance characteristics in Kuwait. The study used univarite and
multivariate regression analysis as the methodology for the data obtained from 170
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listed companies on Kuwait Stock Exchange for the year 2007. The corporate
governance characteristics used in the study included proportion of non-executive
directors and family members in the total number of board of directors, role duality and
voluntary audit committee. It was found that out of the four corporate governance
characteristics, only voluntary audit committee had a significant and positive relation to
voluntary disclosure.
Al Mutairi and Hassan (2011) investigated the effects of corporate governance,
corporate financing strategy and ownership structure on firm performance. The study
used data from 80 listed firms of Kuwait Stock Exchange over a period of 2000-2008.
A panel-based regression methodology was used to measure the impact of the
variables on firm performance. It was found that ownership structure does not play an
important role as determinant of performance and value of firms measured. After a
certain point, an increase in government ownership was found to have a negative
impact on firm activities. An endogenous determination of ownership structure and
large shareholders will lead to the capital structure having a negative and significant
impact on firm value. The concentration of ownership is found to enhance corporate
value.
Al-Wasmi (2011) investigated the corporate governance practices in Kuwait. The level
of disclosures required by the Kuwait Stock Exchange was low and inefficient in
comparison to the international standards. It was also found that the corporate
governance practices do not ensure protection of minority shareholder in Kuwait.
Alfaraih et al. (2012) conducted an empirical study on the effects of institutional and
government ownership on firm performance in Kuwait. The research used data for 134
listed firms on Kuwait Stock Exchange. Tobin Q, a market-based performance measure,
and ROA, an accounting measure, were used as indicators of firm performance. The
institutional shareholders and government ownership have positive and negative
impacts, respectively, on firm performance.
Al-Saidi and Al-Shammari (2012) investigated the corporate governance practices in
Kuwait from the stakeholder perspective. The study used semi-structure interviews to
gather perceptions of stakeholders and used grounded theory to interpret them. It was
found that corporate governance mechanisms were not organised in Kuwait, but the
concepts are well-known. The current laws were found to be irrelevant, and steps
needed to be taken to remove obstacles in improving them.
Research of corporate governance practices in Qatar
Hossain and Hammami (2009) did an empirical research to examine the determinants
of voluntary disclosure in Qatar. The data used 25 listed firms at Doha Securities Market
from the banking, insurance, service and industrial sectors. It was found that firm
characteristics such as age, assets, complexity and assets-in place variables are
significant in explaining the levels of voluntary disclosure, whereas profitability was
insignificant as an explanation factor.
Sharar (2011) made a comparative study of compliance by Qatari companies to the
Organisation for Economic Co-operation and Development (OECD) Principles of
Corporate Governance Code issued in 2004. It was encouraging to find that Qatar
Financial Market Authority had issued a corporate governance code for listed joint
stock companies which commensurate with the OECD principles. The corporate
governance code in Qatar is also customised to the needs of its business environment
and deficiencies.
Almudehki and Zeitun (2012) investigated the effects of ownership structure on firm
performance measured by Tobin Q. The ownership structure was classified as board,
institutional, concentrated and foreign stake. The data comprised 29 listed firms, and
information of these firms were collected from 2006 to 2011. It was found that the board,
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concentrated and foreign ownership, had a significant and positive relationship with
firm performance. The institutional ownership was linked to a negative impact on firm
performance.
Research of corporate governance practices in Saudi Arabia
Al-Twaijry et al. (2003) examined the role of audit committees in Saudi Arabia through
a series of research interviews. The virtues of audit committees such as independence
and expertise were found to be questionable. The audit committees also failed to
establish a link between the internal and external auditors in the firms of Saudi Arabia.
Al-Turki (2006) conducted an empirical investigation on the corporate governance
practices in Saudi Arabia. It was found that shareholders were allowed to participate in
the general meetings of the Saudi joint stock companies, but the minority shareholders
were inadequately protected. There were violations with reference to the audit
committees, adequate disclosures and transparency.
Al-Matari et al. (2012) did an overview of the corporate governance practices in Saudi
Arabia. The study focussed on corporate governance mechanisms’ (such as board
composition, CEO duality, board size, audit committee independence, audit committee
activities and audit committee size) impact on firm performance. The research
concluded lack of relevant research available in the field of corporate governance in
Saudi Arabia. The mechanisms such as audit committees and board of directors have
been inefficient due to lack of independence and qualified members.
Fallatah and Dickins (2012) conducted an empirical investigation of corporate
governance characteristics and its impact on Saudi Arabia firm performance and firm
value. Tobin Q was used as a market-based measure and ROA as an accounting
measure of firm value and firm performance. There was an insignificant relationship
between corporate governance and firm performance but a positive relationship
between corporate governance and firm value.
Alghamdi (2012) investigated the motivations and techniques of earnings management
practices in Saudi Arabia. The study also investigated the impact of corporate
governance and external audit on earnings management practices. The methodology
used by the research involved questionnaires, semi-structured interviews and
secondary data. The financial firms were excluded from the study and all other listed
firms were included. The motivations that were found behind the earnings management
practices were to increase remuneration, report profit or to avoid losses, obtain bank
loans or to increase the share price. Internal corporate governance mechanisms such
as independent directors, board size and board meetings are found to have a
significant impact on earnings management.
Research of corporate governance practices in the UAE
ALJifri and Moustafa (2007) conducted an empirical analysis to measure the impact of
internal and external governance mechanisms on the firm performance in UAE. The
study included 51 listed firms with data of 2004. The firm performance was measured
through the Tobin Q ratio. A significant relationship was found between the firm
performance and corporate governance mechanisms of government ownership, debt
ratio and the payout dividend ratio. Whereas the mechanisms of institutional ownership,
board size, firm size and audit type had an insignificant impact on the firm performance.
Al-Tamimi (2012) analysed the perceptions of the impact of corporate governance
practices on the firm performance of UAE national banks. A positive relationship was
found between the corporate governance practices of banks and performance level.
The UAE banks were also found to have awareness on the importance of corporate
governance mechanisms of executive compensation, relationships with stakeholder,
role of board of directors, disclosure and transparency.
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Research of corporate governance practices in GCC region or other relevant comparative
studies of some GCC countries
Oyelere et al. (2007) conducted a comparative study of corporate governance
practices in Oman, UAE and Singapore. The study covered data from 2002 to 2004. The
research concluded the importance of country-specific importance of corporate
governance mechanism that affects firm performance. Corporate governance
mechanism of ownership structure was not found to be an important determinant in
Oman and Singapore. Firm size, performance and auditor status were important
variables in Oman. The empirical analysis of corporate governance mechanism and
firm performance in the UAE reflects a positive relationship with government ownership.
The debt ratio and dividend ratio were found to have a negative relationship with firm
performance.
Arouris et al. (2011) investigated the impact of corporate governance mechanisms on
banks’ performance in the GCC countries. The study included data of 27 listed banks
for the year 2008. Kuwait was not included in the study due to unavailability of data from
banks. Firm performance had a positive impact with foreign ownership, negative impact
with concentrated ownership and no association with institutional ownership. CEO
duality and board size had an insignificant impact on the banks performance.
Mujtaba and Williams (2011) studied the relationship between board composition and
its impact on the independence in GCC, the UK, Europe and the USA. The top ten GCC
banks under study did not have executive directors on their board of directors. The
proportion of independent directors in the board of directors was higher in developed
countries, whereas for the GCC countries, the term was found to be new. It was also
found that many of the companies did not disclose which of their directors are
independent.
Al-Janadi et al. (2012) made a comparative study of disclosure practices in Saudi
Arabia and UAE. The data were analysed for the years 2006 and 2007. The UAE was
found to have higher voluntary disclosures in comparison to Saudi Arabian companies.
Al-Musalli and Ismail (2012) studied the relationship between the characteristics of
board of directors and intellectual capital performance. The study used a sample of 49
GCC banks for the period of 2008-2010. It was found that in comparison to the banks
in the UK and Malaysia, the GCC banks’ mean intellectual capital performance was
much lower. GCC banks’ mean intellectual capital performance was better than
Australian banks. A negative association was found between the number of
independent directors in the board and intellectual capital firm performance. The study
proposes the need to restudy the composition of independent directors in GCC
countries.
Critical analysis of the existing studies on corporate governance practices of
GCC countries
Table I analyzes the existing studies of corporate governance practices in the GCC
countries. It is found that most of the existing studies suffer from various limitations that
suggest a need for a detailed empirical analysis. The GCC banks have very recently
adopted the corporate governance practices over the past decade. Empirical studies
in the field of corporate governance practices in the GCC region would support
policymakers with suggestions on making improvements and increasing its compliance
as well.
Conclusion
This paper is an attempt to identify the literature gaps in the study of corporate
governance and its impact on firm performance of GCC financial sector. The existing
research studies has reflected several limitations that accentuates the problem that
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Table I Summary and critical analysis of previous literature on corporate governance practice of GCC countries
Authors Critical review
Hussain and Mallin (2002) The study administered a questionnaire to the listed companies only. The sample size under
study was small and those companies not listed were not covered. The companies from
financial and non-financial sector were studied in Bahrain. The outcome of the study was
common for both types of firm. There was no investigation of corporate governance
mechanism impact on firm performance
Hussain and Mallin (2003) This was a second study on the board dynamics of listed companies in Bahrain. The
response rate of the questionnaire administered was poor. The study was conducted in a
time period when there was no corporate governance code in the country. There was no
investigation of corporate governance mechanism impact on firm performance
Al-Shammari and Al-Sultan (2010) This was an empirical study of relationship between voluntary disclosure and corporate
governance characteristics of listed companies in Kuwait. The data under study were only for
2007 which do not give a meaningful interpretation. The impact on firm performance was not
measured
Al Mutairi and Hassan (2011) This was an empirical study to measure the effect ownership structure on firm performance.
The data under study were for 80 listed firms and for a period of 2000-2008. The period
under study gives a meaningful interpretation due to eight years of data, but it does not
segregate the impact on financial and non-financial firms
Al-Wasmi (2011) A general study to review the corporate governance practices in Kuwait. It does not measure
the impact of these practices on firm performance
Alfaraih et al. (2012) This study measured the effect of ownership structure on firm performance of 134 listed non-
financial firms. The financial firms were excluded from study. The period under study was
only for the data in 2010; thus, the results of the study lose its importance. The results of this
research can be extended to non-financial firms
Al-Saidi and Al-Shammari (2012) This study viewed the stakeholder perspectives of Kuwait’s corporate governance practices.
There was no measurement of impact on firm performance
Hossain and Hammami (2009) This study used a limited number of financial and non-financial listed firms in Qatar. There
was no measurement of impact on firm performance
Sharar (2011) This was only a comparative study and no empirical investigation to measure the impact on
firm performance
Almudehki and Zeitun (2012) This was an empirical study to measure the effect of ownership structure on firm performance
of 29 non-financial Qatar firms. The period under study was five years (2006-2011), thereby
giving a meaningful interpretation. The study does not include non-listed firms, and the
impact of other corporate governance mechanisms is not measured
Al-Twaijry et al. (2003) The study only examined the role of audit committees in Saudi Arabia through interviews
Al-Turki (2006) This study also investigated the corporate governance practices in Saudi Arabia but does not
measure its impact on firm performance
Al-Matari et al. (2012) Only concludes on the effectiveness of corporate governance practices but does not
measure its impact on firm performance
Fallatah and Dickins (2012) The study was an empirical investigation to measure the corporate governance
characteristics’ impact on firm performance and firm value. It was a useful study, as the
period under study was from 2006 to 2009. The listed firms of Saudi Arabia were selected
across 14 industry classifications and only insurance sector was excluded. Thus, the
conclusions are not applicable to the financial or non-financial sector specific. Nevertheless,
this is an important contribution, as most of the corporate governance mechanisms are
considered in the study
Alghamdi (2012) The study was considering only the motivations and techniques behind earnings
management practices in Saudi Arabia. Corporate governance seeks to tackle the earnings
management practices. The impact on firm performance is not measured
ALJIFRI and Moustafa (2007) This study measured the impact of internal and external corporate governance mechanism of
corporate governance on firm performance in the UAE. Fifty-one listed firms were included in
the study, and only the data for 2004 were considered. A one-year study is a major limitation
of this study. In addition, the listed firms are not classified into financial and non-financial
firms; thus, the results are extended as general applicability which would not always be true
Al-Tamimi (2012) The study measured the perceptions of the impact of corporate governance practices on
performance and financial distress of the UAE national banks. A perception-based study that
uses questionnaires. The conclusions are valid for perceptions only
Arouri et al. (2011) An important study of corporate governance mechanisms’ impact on firm performance of
GCC banks. The period under study was for the year 2008, and Kuwait was excluded from
the study. The limitation of the study is the period and limited sample data
Source: Own interpretation
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relates to the regulatory setup, compliance and identification of any developments in
the corporate governance practices. Because of the global financial crisis, it was
identified that banks faced crisis because of option-based compensation (Bebchuk and
Spamann, 2010). When the corporate governance practices were unable to protect the
stakeholders of the financial sector during the crisis, there was an emerging need to
improve the regulations. Subsequent to the crisis, the Basel Committee on Banking
Supervision revisited the principles of corporate governance of banking sector and
revised the principles in 2010. Thereby, regulations adjusted to consider the
microprudential issues along with macroprudential issues as well.
As the previous studies in the GCC sector suggest that there are several limitations
such as a single-period study, non-segregation of financial and non-financial firms,
limited data or not specifically measuring the impact of corporate governance
mechanisms on firm performance. Because of these limitations, the region cannot
provide meaningful and relevant suggestions to the region for the development and
protection of the banking sector. As frontier markets, the GCC sector needs to keep in
line with the developments of the corporate governance practices in the developed and
emerging markets. Yet they need to understand the impact of these practices within the
uniqueness of the business environment, business models and organisational
structure. This paper suggests that future research has to be undertaken for
sector-specific investigation of corporate governance impact on firm performance in
the GCC. The period under study should be a minimum of five years, and there should
be a possibility of including non-listed firms in the study as well.
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Corresponding author
Tamanna Abdul Rahman Dalwai can be contacted at: [e-mail]
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