Summary
This document examines the impact of the board of directors on the performance variability of banks
in the Middle East and North Africa (MENA) region. Based on a sample of 97 banks over the period
2016-2020, the study utilized four corporate governance mechanisms to examine their effect on two
performance measures: ROA and ROE. Additionally, the study used three control variables to isolate
the effect of corporate governance variables on bank performance. Using panel data regression, the
results indicate that board size, CEO duality, and the presence of institutional directors on the board
are the only corporate governance mechanisms that have a positive and significant effect on return
on assets (ROA). Board size has a negative and significant effect on return on equity (ROE), while the
presence of institutional directors on the board has a positive and significant impact on return on
equity (ROE).
Keywords: banks, board structure, performance, MENA
Introduction
Corporate governance has sparked numerous debates among researchers over the past three
decades. Corporate governance can be defined as the systems, structures, and processes that guide
and control a company (Lee, 2008). Many researchers (e.g., Brick et al. (2005); Kajola (2008); Jackling
and Johl (2009); Black and Kim (2012); Zaman R. (2015); Taguchi and Wanasilp (2018)) have found
that good corporate governance improves company profitability and performance.
Todorovic (2013) believes that good corporate governance can prevent scandals and fraud within a
company, reduce civil and criminal liability, improve the company's image and reputation, and
increase stakeholder trust. Furthermore, Narwal and Jindal (2015) indicated that for developing
economies, good corporate governance is an essential tool for the globalization of business
organizations.
Given the importance of the banking sector in both developed and developing countries, many
researchers have studied the role of corporate governance in enhancing the safety and soundness of
the banking sector and improving its ability to withstand internal or external shocks and crises.
Mulbert (2010) noted that corporate governance is considered a central issue in the modern banking
sector. Caprio et al. (2007) believe that corporate governance helps ensure efficient resource
allocation and the robustness of the financial system. Additionally, Mangla (2012) emphasized that
good corporate governance is a crucial factor in improving the financial performance of banks, both
in developed and developing countries. Therefore, good corporate governance should improve bank
performance.
Based on the elements outlined above, the objective of this study is to analyze the influence of
corporate governance mechanisms on the performance of banks, based on a sample of banks
operating in the MENA region.
**Literature Review and Hypothesis Development**
According to agency theory, the board of directors is responsible for overseeing management
decisions (Sumner & Webb, 2005). However, agency conflicts can arise within the board. Thus, the
structure of the board seems to affect performance. In our study, we focus on the size and
composition of bank boards (CEO duality, the presence of independent and institutional directors).
**2.1. Board Size**
The primary function of the board of directors is to monitor and advise executives (Jensen, 1993).
Board size is mainly used as an indicator of its effectiveness. According to resource dependence
theory (Pfeffer & Salancik, 1978), a larger board facilitates the oversight of executives while bringing
a wealth of managerial skills and experience, complicating the possibility for the CEO to manipulate
the board (Zahra & Pearce, 1989). However, proponents of agency theory (Jensen, 1993) argue that a
larger board may lead to coordination, monitoring, and flexibility issues in decision-making
processes, as board members may collude with executives to expropriate other stakeholders. Agency
theory predicts that a smaller board is more effective. Previous research has presented mixed results
regarding the relationship between board size and bank performance.
Some studies have identified a significant positive relationship between board size and bank
performance. For instance, Al-Smadi (2013) observed a significant positive correlation in Saudi
Arabia. Similarly, Al-Amarneh (2014) examined 13 listed banks in Jordan from 2000 to 2012 and
found that an increase in board size was associated with improved bank performance, highlighting
the importance of good governance practices for stakeholders and investors. Bace (2017) also noted
a positive correlation between board size and the profitability of Saudi banks, measured by ROE,
during the period 2010 to 2015. Rahman and Islam (2019) discovered a positive influence of board
size on bank performance in Bangladesh. Mertzanis et al. (2019) documented a significant positive
relationship between board size and company performance in the MENA region. Djebali and
Zaghdoudi (2020), using a sample of ten Tunisian commercial banks listed on the Tunis Stock
Exchange from 1998 to 2015, found a positive and significant correlation between board size and
performance. Habtoor (2022) studied 12 banks listed on the Saudi Stock Exchange over a period of
10 years, from 2009 to 2018, and found a positive relationship between board size and bank
performance measured by ROA.
On the other hand, some studies have found an inverse relationship between board size and bank
performance. Boussaada and Karmani (2015) examined a sample of 38 banks in the MENA region
over the period 2004-2011 and concluded that reducing board size was associated with improved
bank performance. Al-Sahafi et al. (2015) also noted a significant negative association between board
size and the financial performance of banks, using indicators such as ROA, ROE, and Tobin's Q.
Bhattrai (2017) conducted a study on 13 commercial banks in Nepal from 2010 to 2015 and found a
negative impact of board size on the financial performance of these banks. Sbai and Meghouar
(2017) studied six banks listed on the Casablanca Stock Exchange over the period 2009-2015 and
obtained similar results, showing a negative influence of board size on performance, measured by
ROA and ROE. Fatiha et al. (2022) examined the relationship between board size and bank
performance in Qatar from 2011 to 2020 and found a negative relationship between these two
variables. Mkadmi et al. (2022) also found a negative relationship between board size and banking
performance. Widarwati et al. (2022) noted that a higher number of board members was linked to
lower bank performance.
Additionally, there are studies that have not found a significant relationship between board size and
bank performance. James and Joseph (2015), analyzing a sample of 18 Malaysian banks from 2009 to
2013, concluded that board size had no significant relationship with bank performance. Al-Sagr et al.
(2018) did not find a significant relationship between board size and the performance of nine Saudi
banks from 2011 to 2016. Even during the COVID-19 pandemic period in the MENA region, El-
Chaarani et al. (2022) found that board size did not have a significant effect on bank performance.
Based on these studies, we propose the first hypothesis:
H1: Board size has a negative impact on bank performance in the MENA region.
**CEO Duality**
CEO duality refers to the situation where the same person holds both the CEO and chairman of the
board positions. This duality can impact the board's independence (Fama & Jensen, 1983) and
strengthen the CEO's power (Boyd, 1995). Separating these two roles benefits the board's
effectiveness in its oversight role (Beatty & Zajac, 1994). Agency theory highlights the importance of
separating the CEO and chairman roles to ensure board independence and improve corporate
transparency (Jensen, 1993). Concentrating power can exacerbate potential conflicts of interest and
reduce oversight effectiveness, as it limits the flow of information to other board members, thereby
compromising the board's independent oversight of the CEO (Fama & Jensen, 1983; Jensen, 1993).
Several studies have examined the impact of CEO duality on bank performance, with mixed results.
Some studies have identified a significant positive relationship between CEO duality and bank
performance. For instance, Mamatzakis et al. (2015) found that CEO power positively affected the
performance of U.S. investment banks. Chenini and Jarboui (2016) revealed that the dual role of CEO
and chairman had a significantly positive influence on performance. Mertzanis et al. (2019) found
that separating the CEO and chairman roles positively impacted the performance of banks in the
MENA region.
Conversely, some studies have noted an inverse relationship between CEO duality and bank
performance. Georgantopoulos et al. (2017) analyzed Greek banks and found a negative effect of
CEO duality on performance. Similarly, Sbai and Meghouar (2017) studied Moroccan banks and also
found a negative influence of CEO duality on performance. Belkebir et al. (2018) indicated that
variables representing duality had a statistically significant and negative effect on bank performance.
Sarkar et al. (2018) showed that CEO duality negatively impacted the performance of banks in India.
Nuanpradit (2018) highlighted that the use of dual CEO and chairman roles could harm overall
company performance.
Other research has concluded that there is no significant link between CEO duality and firm
performance. Al-Amarneh (2014) found a positive but not significant association between CEO
duality and the performance of Jordanian banks. Boussaada and Karmani (2015) indicated no
significant relationship between CEO duality and bank performance. Belhaj & Mateus (2016)
concluded that CEO duality did not significantly affect the performance of European banks. Abdul
Gafoor et al. (2018) found that the separation of CEO and chairman roles did not significantly
improve bank performance in India. Djebali and Zaghdoudi (2020) also concluded that CEO duality
did not significantly impact the financial performance of banks. Finally, the study conducted by El-
Chaarani et al. (2022) during the COVID-19 pandemic in the MENA region showed that CEO duality
did not significantly affect bank performance during this crisis period. Thus, we propose the following
hypothesis:
**H2: CEO duality has a negative impact on bank performance in the MENA region.**
### Independent Directors
According to agency theory, independent directors are incentivized to act as monitors of
management because they want to protect their reputation as effective and independent decision-
makers (Fama & Jensen, 1983). A larger number of independent directors is considered an important
element of an effective board (Yermack, 1996; Fama & Jensen, 1983). However, the presence of
independent directors can make information exchange within the board more difficult, as they
prevent bank managers with specific knowledge from joining the board (Adams & Ferriera, 2007;
Andres & Vallelado, 2008). Indeed, executive directors facilitate information transfer between board
members and managers (Adams & Ferreira, 2007; Coles et al., 2008). However, empirical results
concerning board independence and performance are mixed.
Several studies have shown a positive link between board independence and bank performance.
Fernandes et al. (2016) found that banks with large independent boards performed better during the
2007-2008 financial crisis. Dong et al. (2017) found that board independence is linked to increased
profit efficiency of banks. Abdul Gafoor et al. (2018) discovered a significant positive relationship
between board independence and bank performance. Ataur and Jahurul (2018) indicated that the
presence of an independent board had a significant positive impact on return on equity (ROE) and
earnings per share (EPS).
Sarkar and Sarkar (2018) found that the proportion of independent directors had a positive effect on
the performance of private banks in India. Handriani and Robiyanto (2019) found that an
independent board had a significant positive effect on the financial performance of companies listed
on the Indonesian Stock Exchange. Bezawada & Adavelli (2020) found that board independence had
a significant positive impact on return on assets (ROA). Djebali et al. (2020) observed a positive
impact of board independence on the performance of Tunisian banks. During the COVID-19
pandemic, El-Chaarani et al. (2022) analyzed a sample of 148 banks in the MENA region and found
that the presence of independent board members had positive effects on banks' financial
performance during the crisis period.
Contrary to the above results, Battaglia and Gallo (2015), using a sample of 15 Chinese and 21 Indian
listed banks over the period 2007-2011, showed that a higher percentage of external directors leads
to a deterioration in ROE and ROA. Additionally, Sarkar and Sarkar (2018) showed that the proportion
of independent directors negatively impacted the performance of public banks in India. Al-Sagr et al.
(2018) showed that increasing the percentage of independent board members harmed the
performance of Saudi banks. Mertzanis et al. (2019) found that board independence is a significant
negative predictor of corporate performance in the MENA region. Gwaison et al. (2021) showed that
board independence had negative effects on the financial performance (ROA) of commercial banks in
Nigeria.
Moreover, existing literature also reports a non-significant relationship between independent
directors and performance. Boussaada and Karmani (2015) concluded that there is no significant link
between the presence of independent board members and bank performance in the MENA region.
Rashid (2018) showed no influence between board independence and the performance of 135
companies listed on the Dhaka Stock Exchange. Examining data from 12 banks listed on the Saudi
Stock Exchange from 2009 to 2018, the results revealed a non-significant association between board
independence and bank performance. Therefore, we formulate the following hypothesis:
**H3: The proportion of independent directors is positively related to bank performance in the
MENA region.**
### Institutional Directors
Proponents of the activism theory draw on agency theory and argue that institutional investors are
more aware and more competent than other shareholders (Pearce & Zahra, 1992). However,
proponents of the passivity theory argue that institutional investors are expected to play a passive
role in the governance of banks. Nonetheless, studies examining the impact of institutional directors
on bank performance have reached mixed conclusions.
Hutchinson et al. (2015) found a positive relationship between institutional investors and firm
performance in China. Lin and Fu (2017) also showed that institutional ownership positively affects
firm performance. In the Lebanese context, Azoury et al. (2018) analyzed 35 of the largest banks
operating between 2009 and 2014. Their empirical results reveal that the presence of institutional
directors has a positive and significant effect on the ROA of Lebanese banks. Similarly, Derbali et al.
(2020) analyzed a sample of 11 Tunisian banks during the study period from 1999 to 2018. The
results revealed that the number of institutional directors played an important role in increasing the
financial performance of Tunisian banks.
Among the studies highlighting a negative link between institutional directors and bank performance,
Chenini et al. (2016) found a negative effect of the presence of institutional directors on the
performance of Tunisian banks. In France, Fattoum-Guedri et al. (2018) showed that institutional
investors have a negative and significant impact on firm performance. Djebali and Zaghdoudi (2020),
using a sample of ten Tunisian commercial banks over the period 1998-2015 and the generalized
method of moments (GMM), highlighted a negative impact of the presence of institutional investors
on the performance of these banks.
Furthermore, other studies have observed a non-significant relationship between institutional
directors and performance. Rahman and Reja (2015) conducted a study on a sample of 22 Malaysian
commercial banks over a period from 2000 to 2011. Their study did not reveal an association
between institutional investors and bank performance. Finally, Boussaada and Karmani (2015)
concluded that the participation of institutional directors on the board had no significant impact on
the performance of 38 banks in the Middle East and North Africa (MENA) region.
Thus, we formulate the following hypothesis:
**H4: The proportion of institutional directors has a positive impact on the performance of banks in
the MENA region.**
### 3. Empirical Methodology
#### 3.1. Sample
This study focuses on the impact of board characteristics on the financial performance of
conventional banks in the MENA region, measured through ROA (Return on Assets) and ROE (Return
on Equity).
We used a sample of 97 conventional banks from 11 countries in the Middle East and North Africa
region: Saudi Arabia, Bahrain, Egypt, United Arab Emirates, Jordan, Kuwait, Lebanon, Morocco,
Oman, Qatar, and Syria. The study period covers five years, from 2016 to 2020, totaling 485
observations in a panel data framework.
The analyses were performed using STATA software, focusing on governance variables. Only banks
that published their management information were included.
We collected information on board characteristics and financial data by examining the Bankscope
database as well as the annual reports of the selected banks. However, some banks were excluded
from the sample due to the absence of necessary governance variables for the analysis.
Consequently, our study was limited to the countries listed in Table 1.
**Table 1: Sample Description**
| Country | Number of Banks |
|-----------------------|-------------------|
| Saudi Arabia |X |
| Bahrain |X |
| Egypt |X |
| United Arab Emirates | X |
| Jordan |X |
| Kuwait |X |
| Lebanon |X |
| Morocco |X |
| Oman |X |
| Qatar |X |
| Syria |X |
(Note: Replace "X" with the exact number of banks for each country after verifying the collected
data)
The sample is balanced, allowing for a robust analysis of the relationships between board
characteristics and the financial performance of banks in the MENA region.
### Descriptive Statistics
The table below presents the descriptive statistics regarding the minimum, maximum, mean, and
standard deviation of all the variables included in the study (Table 3).
**Table 3: Descriptive Statistics of Variables**
| Variable | Observations | Mean | Std. Dev. | Min | Max |
|----------|--------------|------|-----------|-----|-----|
| ROA | 485 | 0.013 | 0.008 | 0 | 0.049 |
| ROE | 485 | 0.047 | 0.016 | 0.003 | 0.092 |
| TCA | 485 | 11.748 | 2.608 | 6 | 18 |
| DUAL | 485 | 0.309 | 0.463 |0 |1|
| INDEP | 485 | 0.54 | 0.145 | 0.187 | 0.938 |
| INST | 485 | 0.034 | 0.029 | 0 | 0.16 |
| SIZE | 485 | 20.293 | 3.384 | 13.773 | 26.39 |
| CAP | 485 | 1.399 | 0.764 | 0.002 | 4.737 |
| LIQ | 485 | 0.118 | 0.093 | 0.003 | 0.553 |
**Source: Compiled by the author.**
The descriptive statistics are presented in Table 3. Specifically, the mean ROA and ROE are 0.013 and
0.047, respectively. On average, the banks in the MENA region in our sample have 18 board
members. Regarding the composition of the board, the presence of independent directors appears
more significant than that of institutional directors. We observe that in the majority of banks in the
MENA region, there is a separation of decision
