Impact of Corporate Governance on the Performance of Commercial Banks in Zimbabwe

Abstract

The background of corporate governance dates back to the 19th Century when state corporation laws enhanced the rights of corporate boards without unanimous consent of shareholders. The concept propounds that corporation should have a good board structure in order to enhance performance. It is firmly rooted on the assumption that good corporate governance practices enhance corporate performance. However, there is no consensus on the impact of corporate governance on performance. The increasing role of the financial sector, on both economic development and poverty alleviation, has seen the concept being applied more on the financial sector than before; this has been further aggravated by world financial crisis, and its consequences. In this regard, Zimbabwe is no exception, during the period 2003-2009 the Zimbabwe witnessed unprecedented failure in the financial sector rooted from a number of issues; but chief among them has been cited as poor corporate governance practices. However, there have been mixed feelings on the extent to which bank performance can be attributed to corporate governance. The paper presents the findings of the study that was conducted to investigate the impact of corporate governance on the performance of commercial banks in Zimbabwe. Using data gathered from 2009-2012, for a sample of five commercial banks, it applies multi-regression model, to assess the causal relationship between corporate governance measures (board size, board composition, internal board committees and board diversity) and bank performance. The results indicate unidirectional causal relationship from corporate governance to bank performance. In addition, there a positive relationship between board composition, board diversity and commercial bank performance, although a negative relationship appears between board size, board committees and bank performance. Therefore, in order to improve performance in commercial banks good corporate governance practices must implemented, this includes improving board structures, disclosure, and fiduciary duties of directors. On the hand the Reserve Bank of Zimbabwe should ensure or put in place robust supervisory and regulatory policies; the development and implementation of a national corporate governance code is long overdue. DOI: 10.5901/mjss.2014.v5n15p93