Alem Gebremedhin

ADDIS ABABA UNIVERSITY
SCHOOL OF GRADUATE STUDIES

COLLEGE OF MANAGEMENT, INFORMATION AND ECONOMIC
SCIENCE
A STUDY ON THE APPLICATION OF CORPORATE GOVERNANCE

PRINCIPLES IN THE ETHIOPIAN PRIVATE COMMERCIAL
BANKS
(THE CASE OF LION INTERNATIONAL BANK)
BY
ALEM GEBREMEDHIN
A Thesis Submitted to the School of Graduate Studies of the

Addis Ababa University in Partial Fulfillment of the
Requirements for the Degree of Master of Arts in Business
Administration (Finance)
June, 2011
Addis Ababa
DECLARATION
I, the undersigned, declare that this thesis is my original work and has not been presented for a
degree in any other university, and that all source of material used for the thesis have been duly
acknowledged.
Declared by:
Name: Alem Gebremedhin
__________________
Signature
_________________
Date
Confirmed by Advisor:
Name: Abebe Yitayew (Asst. Prof.)
_________________
Signature
_________________
Date
Place of submission: Addis Ababa, June 2011.

Statement of Certification
Here with, I state that Ato Alem Gebremedhin has carried out this research work on the topic
entitled ‘a study on the Application of Corporate Governance principles in the Ethiopian private
commercial banks (The Case of Lion International Bank)’ under my supervision. This research
work is original in nature and has not presented for a degree in any university, which all sources
of materials used for the study have been duly acknowledged and it is sufficient for submission
for the partial fulfillment for the award of Master of Arts in Business Administration (Finance).
Approved by Board of Examiners:
Abebe Yitayew (Asst. Prof.) _______________ _________________
Advisor Signature Date
_______________________ ______________ _________________
Examiner Signature Date
_______________________ ______________ _________________
Examiner Signature Date

Acknowledgements
The assistance from many individuals has made this study possible. First of all, I would like to
acknowledge my thesis advisor Abebe Yitayew (Asst. Prof.) for his professional guidance,
constructive ideas, and comments. I would also like to thank the board members, the executive
manager and the board secretary of the Lion International Bank, who were actively involved in
this study and devoted necessary time to complete the questionnaire and to make the interview
that served as study material for this research.
My great thanks also go to the staffs of the National Bank of Ethiopia for providing me the
necessary and available materials I need.
Finally, I want to express my deepest thanks for my families and friends who encouraged me by
providing moral and material support.
i
Table of Content
Content Page
Acknowledgements……………………………………………………………………………………………….i
Table of contents…………………………………………………………………………………………………..ii
List of tables………………………………………………………………………………………………………….v
List of Appendices…………………………………………………………………………………………………vi
Acronyms……………………………………………………………………………………………………………..vi
Abstract………………………………………………………………………………………………………………..vii
CHAPTER ONE_ INTRODUCTION
1.1. Background of the study……………………………………………………………………………………………..1

1.2. statement of the problem…………………………………………………………………………………………..5
1.3. Objective of the study…………………………………………………………………………………………………8
1.4. Scope of the study……………………………………………………………………………………………………...9
1.5. Significance of the study……………………………………………………………………………………………..9
1.6. Limitations of the Study……………………………………………………………………………………………..10
1.7. Organization of the paper…………………………………………………………………………………………..11
CHAPTER TWO _REVIEW OF RELATED LITERATURE
2.1. Theoretical Frame Work…………………………………………………………………………………………….12
2.2. Separation of Ownership and Management (Agency Relationship)……………………………16
2.3. The interest of corporate governance in banks………………………………………………………….17
2.4. Why bank corporate governance is different?...............................................................19
2.5. Over view of the Corporate Governance Theories……………………………………………………..21
2.5.1. Fundamental Corporate Governance Theories…………………………………………………….21
2.5.1.1. Agency Theory………………………………………………………………………………………………..21
2.5.1.2. Stewardship Theory………………………………………………………………………………………..21
2.5.1.3. Stakeholder Theory………………………………………………………………………………………..22
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2.5.1.4. Resource Dependency Theory……………………………………………………………………….22
2.5.1.5. Transaction Cost Theory…………………………………………………………………………………22
2.5.1.6. Political Theory………………………………………………………………………………………………23
2.5.2. Ethics Theories of Corporate Governance……………………………………………………………23
2.5.2.1. Business ethics theory…………………………………………………………………………………..23
2.5.2.2. Feminist ethics theory…………………………………………………………………………………..24
2.5.2.3. Discourse ethics theory…………………………………………………………………………………24
2.5.2.4. Virtue ethics theory………………………………………………………………………………………24
2.6. Review of related literature on corporate governance……………………………………………..24
2.7. Introducing Corporate Governance in Ethiopia………………………………………………………….25
2.8. Review of international Corporate Governance Principles………………………………………..27
2.8.1. OECD Principles of Corporate Governance………………………………………………………..28
2.8.2. Basel Committee on Banking Supervision………………………………………………………….29
2.9. Applicability of the Principles of Corporate Governance…………………………………………..32
2.10. Relevant Laws and Directives on Corporate Governance in Ethiopia……………………….33
2.10.1. Commercial Code of Ethiopia 1960…………………………………………………………………..33
2.10.2. The Banking Business Proclamation No. 592/2008…………………………………………..35
CHAPTER THREE_RESEARCH DESIGN AND METHODOLOGY
3.1. Research Design………………………………………………………………………………………………………..37
3.2. Sources of Data and Sampling Techniques………………………………………………………………..38
3.2.1. Source of data…………………………………………………………………………………………………….38
3.2.2. Sampling Population…………………………………………………………………………………………..38
3.3. Development of Research Instruments and Data Collection Procedures……………….38
3.3.1. Questionnaire………………………………………………………………………………………………….39
3.3.1.1. Design of the questionnaire……………………………………………………………………….39
3.3.2. Interview………………………………………………………………………………………………………….40
3.4. Data Collection Procedure………………………………………………………………………………………….41
3.5. Method of Data Analysis and Presentation………………………………………………………………..41
3.6. Ethical Consideration………………………………………………………………………………………………….42
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CHAPTER FOUR_PRESENTATION AND DISCUSSION OF THE DATA
4.1. Introduction……………………………………………………………………………………………………………….43
4.2. Data obtained through questionnaire and interview…………………………………………………43
4.3. Presentation and Analysis of data obtained through questionnaire and interview……44
CHAPTER FIVE_SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1. Summary……………………………………………………………………………………………………………………69
5.2. Conclusion………………………………………………………………………………………………………………….72
5.3. Recommendations…………………………………………………………………………………………………….74
Bibliography
Appendices
iv
LISTS OF TABLES
Tables pages
Table 4.3.1.1. Age group ............................................................................................................................. 44

Table4.3.1.2. Level of educational qualification ............................................ Error! Bookmark not defined.
Table4.3.1.3. Work experience ................................................................................................................... 45
Table 4.3.2.1.Frequency and Percentage Values of developing a culture of good corporate governance
through out the bank .................................................................................................................................. 46
Table 4.3.2.2.Frequency and Percentage Values of roles and responsibilities of the board................ Error!
Bookmark not defined.
Table 4.3.2.3.Frequency and Percentage Values of ensuring efficiency and effectiveness of the board…54
Table 4.3.2.4.Frequency and Percentage Values of protecting the rights of shareholders and other
stakeholders ................................................................................................................................................ 58
Table 4.3.2.5.Frequency and Percentage Values of the roles and responsibilities of the board committee
.................................................................................................................................................................... 61
Table 4.3.2.6.Frequency and Percentage Values of Transparency and disclosure... 66Error! Bookmark not
defined.
v
LIST OF APPENDICES
Appendix-A: Questionnaire for the Board Members of LIB
Appendix-B: Interview Questions for the Board Members and the Senior Manger and the Board
Secretary of LIB
LIST OF ACRONYMS
LIB: Lion International Bank
OECD: Organization for Economic Cooperation and Development
vi
Abstract
This study was conducted to examine the extent to which corporate governance principles are
applied in the Lion International Bank. A descriptive case study was employed to achieve the
goal of this research. All of the board managers (eleven in number) and the senior manager and
the board secretary which is a total of 18 participants were involved in the study. In order to get
relevant data from the target population questionnaire and interviews were used. The
questionnaire was administered to the board managers and the interviews were conducted with
the senior manager and the board secretary. The data collected through questionnaire were
analyzed using frequency and percentage values and the qualitative data were analyzed using
textual explanations. Furthermore, the qualitative data (data from interview) were analyzed
together with the quantitative one to triangulate the results found from the questionnaire. The
findings generally indicate that the extent of the application of the corporate governance
principles in the Lion International Bank is encouraging even though the bank has still a
problem with regard to enhancing the efficiency and effectiveness of the board and concerning
with the transparency and disclosure of material information. As a result, the study presented
some possible recommendations so as to alleviate the problems. These include, orienting or
inducting for new board members and training for existing board members, carry out annual
evaluation of the board it self, its committees and its members, have the board sufficient
information and time, disclosing the activities of each of the board committees, and explain the
incentive structure and remuneration practices for senior management, as well as the actual
amounts paid to senior managers and to directors.
____________________________
Key words: corporate governance, corporate governance principles.
vii
Application of Corporate governance Principles, the case of LIB
CHAPTER ONE
1. INTRODUCTION
1.1 Background of the study
The ongoing process of globalization and liberalization has led to significant changes in the
relationships between the participant groups and corporate structures. The most remarkable
one among the reasons for change is the increasing ownership of equity shares by
institutional investors. Increases in international and/or internal portfolio investments and
other progresses accomplished in the privatization processes have boosted up the number of
investors of companies. Therefore, the market participants became well informed and the
conditions for acquiring information on the operations, financial position, performance and
development phases of companies on a regular basis, began to improve. Market participants
began to demand a voice in corporate governance and protect their rights (Brancato, 1997).
The relationship among the company’s participants, which is dependent on certain principles
and standards, is defined as “principles of corporate governance”. The principles of corporate
governance are based on a new structural process that enables profitability, development and
compatibility that the companies target in their main sectors. The principles and standards of
corporate governance set the nature of the relationship among shareholders, members of board
1
of directors, managers, employees and other corporations and persons with whom the company
has business links. It mainly protects the rights of the company and its participant groups and
specifies their obligations (Massie, 2000).
Therefore, corporate governance principles are important in terms of setting the rights and
obligations of the said groups and ensuring investor confidence. Such principles also ensure the
establishment of a mutual supervision system between the company managers and the
shareholders. Those who control the company’s management shall have an important influence
on the company’s behavior. The impact of institutional shareholders on the company’s
management is increasing continuously in the developed markets, in particular. On the other
hand, the influence of individual investors remains quite low. Individual investors tend to
assume the controlling shareholders to be honest and transparent rather than finding out more
about their rights and protecting them. The employees, as another participant group of the
company, have important roles in the company’s performance and long-term achievement
(Ibid, 2000).
The management structure of companies changes depending on the economic structure, the
legal system and the social-cultural variations in developed and developing countries. The
performance of the company leading to development is attributable, to a great extent, to many
participant groups. Common benefits contribute to higher performance and such performance
pays back to the company’s participants as an economic contribution (OECD, 1999).
Corporate governance principles started a new process of development since the 1980’s. Since
the late 1980’s, the relationship of financial structures of companies with respect to corporate
governance, and the susceptible economic effects caused consequently began to be examined.
2
Corporate governance principles provide a control mechanism of the company operations and
thus encourage the managers to be more successful and promote the company’s performance
with long-term strategies (Claessens, 2006).
Corporate governance principles are very popular among the privately held companies
particularly banks. The reason is because in many economies the banks are set to play a crucial
role; they are critically important for growth and efficient capital allocation. Hence banks are
considered as vital institutions in any economy as they form an important source for providing
finance to businesses. Their role becomes more important in developing markets, like our
country, where the majority of finance to new and existing businesses comes from the banking
sector, as opposed to finance through the stock market (Business Environment Group,1998).
Having this vital role, understanding the key ingredients for maximizing the banks performance
and their role in the economies need to be dealt with, however. While the application of
corporate governance principles is deemed an important ingredient of bank operation, the
researcher is open to question that the banks (specifically the privet ones) in our country have
placed emphasis on this issue. The paper attempts to deal with this issue.
The governance principles have gradually become the criteria with which the companies must
comply in order to be competitive enough. Compliance with the principles of corporate
governance is a determining factor for performing well on a permanent and consistent basis
thereby help increase confidence in the company, reduce the cost of capital and induce a
suitable ground for procuring long-term financing. Implementation of governance principles
provide for the responsibilities of the board to set policy and strategic direction to the
organization and monitoring management’s performance against that shape the organizations
3
framework for accountability, transparency, probity and respect for the rights of all
stakeholders (Massie, 2000).
Many writers argue that the need to comply with the corporate governance principles is
pronounced these days due to the concern for corrupt country governance and corrupt and
unethical business practices. Especially in developing countries like Ethiopia, when the
systems, rules, and regulations are not well developed; there is paramount importance for
proper management of the existing companies (privet commercial banks here). Given this
significance, complying with the corporate governance principles is these days considered a
necessity for all countries companies and not luxury (Berger et al. 2004).
A bank enforcing the corporate governance principles will perform better over a period of time
and that good governance can reduce the risk and attract further investment (Agrawal et al.,
1996). They add that, better governed banks have more efficient operations and better
performance due to some reasons; governance may reduce the incidence and amounts of
related-parties transactions and other “self-dealing” practices, better governed banks may have
lower cost of capital, especially if they employ subordinated debt financing, better governance
may translate in to more efficient and streamlined operations.
According to Gregory (2000), there is no single model for good corporate governance. The
OECD and the Basel committee for Banking Supervision have identified the corporate
governance principles built on some common elements. These principles are non-binding and
they merely serve as a reference point for countries and their companies. Countries may define
their own corporate governance principles within their own national legislative and regulatory
4
frameworks. Corporate governance practices should be modified in parallel with the ever-
changing conditions of competition.
This study aims to investigate the extent to which the corporate governance principles are
applied in the Ethiopian private commercial banks (the case of LIB), in reference to the
principles identified by the Organization for Economic Co-operation (OECD) and
Development and the Basel committee for Banking Supervision.
1.2 Statement of the Problem
A large portion of the developing country’s business, which our country is no exception, is in
the banking sector in particular and the financial institutions in general. Accordingly, almost all
business entities maintain direct relationships with banks and the other financial institutions
(Shleifer & Vishny, 1997). The impact on economic growth depends on the efficiency of
banks. Therefore, efforts to enhance the operational capabilities and capacities within banks
have to be a primary agenda for over-emphasizing or under-estimating the finest position that is
applicable to the banks may result in a series of difficulties to the banks operation in particular
and to the economic development in general. The corporate governance philosophy has to be
introduced in the banking industry as one, and of course be the primary, of these efforts to
enhance the banks operations.
Given the important financial intermediation role of banks in an economy, their high degree of
sensitivity to potential difficulties arising from ineffective corporate governance and the need to
safeguard depositors’ funds, corporate governance for banking organization is of great
5
importance to the national and international financial systems and merits targeted by
supervisory guidance (Basel Committee for Banking Supervision, 2006). Banks excellence in
terms of customer satisfaction, in terms of return, in terms of product and service, in terms of
return to promoters and in terms of social responsibilities towards society cannot be achieved
without fulfilling the prerequisites (or simply put principles/standards of) for good corporate
governance.
The principles of corporate governance are based on a new structural process that enables
profitability, development and compatibility that the companies target in their main sectors.
The principles or standards of corporate governance set the nature of the relationship among
shareholders, members of board of directors, managers, employees and other corporations and
persons with whom the company has business links. It mainly protects the rights of the
company and its participant groups and specifies their obligations. Therefore, corporate
governance principles are important in terms of setting the rights and obligations of the said
groups and ensuring investor confidence (Massie, 2000).
Supporting this, Babic (2000) points out that implementing the corporate governance principles
or standards in banks in developing economies like our economy is important for the following
reasons:
First, banks have an overwhelmingly dominant position in economy’s financial systems, and
are extremely important engines of economic growth
Second, as financial markets are almost in existence in the economy of ours, banks are typically
the most important source of finance for the majority of firms.
Third, as well as providing a generally accepted means of payment, banks in our country are
usually the main depository for the economy’s savings.

6
Similarly, Berger et al. (2004) have forwarded their findings that the unique nature of the
banking firm, especially in the developing countries like Ethiopia, requires the application of
corporate governance principles which put in a nutshell both shareholders and depositors, be
adopted for banks.
In spite of the intrinsic importance for the economic health of corporations, economy and
society in general, however, the extent to which banks are complying with or applying these
principles is the least studied area of management (Juran & Louden, 1966), especially in
developing economies like ours. In general, the literature on the application of corporate
governance principles in the Ethiopian context is very poor. There does not seem to be lake of
awareness of the importance of the corporate governance principles. It is not given the required
attention in executive management development programs rather.
The researcher found one research work prepared in Ethiopia concerning corporate governance.
It was done by Daniel Berhane Reda in 2009 entitled with “corporate governance in privet
banks.” His major finding indicates merely that corporate governance is important for banks
better performance. But his finding did not looking for and giving attention to the application of
the principles or elements of corporate governance. Hence, apart from this conducted research
work that has been mentioning above, I, the researcher believes that dealing with the extent to
which the corporate governance principles are implemented in the Ethiopian private
commercial banks (the case of Lion International Bank) is worth discussing and addressing
issue. It is so because as per Massie (2000), corporate governance is the relationship among the
company’s participants, which is dependent on certain principles and standards so that looking
for the extent of the implementation of these principles and standards is pertinent issue.
7
Accordingly, this study is an attempt to shed light on the scarcely studied area of applicability
corporate governance principles in the Ethiopian private commercial banks, the case of LIB.
In line with the above study of the problem, the following research questions were formulated
to be answered as a result of the research study:
1. Does the bank have a culture of good corporate governance?
2. To what extent the board is discharging its roles and responsibilities?
3. To what extent the bank ensures the efficiency and effectiveness of the board?
4. Are the rights of shareholders and other stakeholders protected?
5. To what extent the board committees are carrying out their roles and responsibilities?
6. Does the bank provide a timely disclosure of its material information (eg.
performance?
1.3 Objective of the Study

i. General objectives
The main objective of the study is to determine the extent to which the corporate governance
principles are applied in the Ethiopian private commercial banks, the case of Lion International
Bank (LIB), in reference to the principles identified by the Organization for Economic Co-
operation and Development (OECD) and the Basel committee for Banking Supervision.
ii. Specific objectives
The specific objectives of the study include:
To study whether the bank develops a culture of good corporate governance
8
To assess the extent to which the board is discharging its roles and responsibilities
To study the degree to what extent the bank guarantees the efficiency and effectiveness of
the board
To assess whether the rights of shareholders and other stakeholders are protected
To investigate the extent to which the board committees are discharging their roles and
responsibilities
To make sure that there is transparency and disclosure of material information in the bank
And lastly but not the least is to evaluate the results from the study and to make
recommendations to management of the organization on how to improve the extent
of the application the corporate governance principles
1.4 Scope of the Study
The researcher believes that it would be appropriate to conduct the study in large scale.
However, the limited time and other resources do not allow doing so. Hence, the study was
confined only to Lion International Bank. The conceptual scope of the study was therefore,
limited to examine the extent to which the corporate governance principles are applied in this
bank.
1.5 Significance of the Study

As is already confirmed above, the main objective of the research is to study on the degree to
what extent the corporate governance principles or standards are applied in the Ethiopian
private commercial bank, the case of LIB and the target group was consisting of board of
directors and the senior manager and the board secretary of the bank.
9
As a result, therefore, the paper was conducted by organizing the information gathered from
this target group through the questionnaire, interview, and secondary sources. Feedback from
the survey target group was analyzed in order to determine shortcomings with in the bank with
regard to the implementation of the corporate governance principles and to make corrective
recommendations.
For that reason, the finding that was obtained as a result of undertaking this research may have
certain areas of significance.
For the most part, the study was aimed at making recommendations for applying the corporate
governance principles at the LIB.
Second, although the recommendations would be directly applicable to the sample bank, the
recommendations could also be indirectly applicable to other privet commercial banks in the
country.
Third, the market participants and policy makers of our country may get worthwhile benefits
from the study.
And finally but not the list, the study may serve as a reference material for other researchers
who need to make a research on this area.
1.6 Limitations of the Study

It is quite known that any study is not absolutely free from limitations. As a result, this study
was conducted with some sort of limitations. The researcher was faced with many problems
which, in fact, may affect the quality of the study. The following were among others:
The reluctance of the banks to fill the questionnaire
10
The delay by the respondents in returning back the questionnaire
Shortage of time to under take the study
1.7 Organization of the Paper

The study was organized in five chapters.
The first chapter dealt with introduction: background of the study, statement of the problem,
objectives, significance, delimitation and limitation of the study.
The second chapter contained review of related literature.
Chapter three was dealt with methodology of the study.
Chapter four also focused on analysis and interpretation of the data collected through
questionnaire and interview.
Finally summary, conclusion and recommendation of the study were given in chapter five.
11
CHAPTER TWO
2. REVIEW OF RELATED LITERATURE
2.1. Theoretical frame work
Corporate governance is not new as a concept, although it is more pronounced these times due
to the increased attention given by organizations and governments in both developing and
developed nations especially in relation to fighting corruption1.
Corporate governance systems have evolved over centuries, often in response to corporate
failures or systemic crisis. The first well-documented failure of governance was the South See
Bubble in the 1700s, which revolutionized business laws and practices in England. Similarly,
much of the Securities Law in the United States was put in place following the Stock Market
Crash in 1929. There have been no shortages of other crisis such as the Secondary Banking
1
Taken from the free encyclopedia Wikipedia, the http://en.wikipedia.org
12
crisis of the 1970s in the UK and the US Saving and Loan debacle of the 1980s. The history of
corporate governance can also be punctuated by a series of well-known company failures; the
Maxwell Group raid on the pension fund of the Mirror Group of newspapers, the collapse of
the Bank of Credit and Commerce International, and Barings Bank. Each crisis or major
corporate failure – a result of incompetence, fraud, and abuse – was met by new elements of an
action for improved system of corporate governance (Magdi and Naderech, 2000).
Since the late 1980’s, the relationship of financial structures of companies with respect to
corporate governance, and the susceptible economic effects caused consequently began to be
examined. Corporate governance principles provide a control mechanism of the company
operations and thus encourage the managers to be more successful and promote the company’s
performance with long-term strategies (Claessens, 2006).
Accordingly, during the past two and half decades the focus was on attention to the application
of the principles of corporate governance in banks as a result of the rapid developments in
financial markets and the globalization of financial flows and technological progress, which led
to the pressures of an increasing competition between banks and non-bank, also led to a rapid
growth in the financial markets and a wide variety of financial instruments to banks, which
increased the importance of risk measurement and management and control, which requires
continuous innovation to business and ways of managing risk and change the laws and
surveillance systems so as to maintain the integrity and strength of the banking system. Since
banks differ from other institutions because the collapse of banks affect a wider circle of
stakeholders resulting in a weak financial system itself which lead to adverse effects on the
13
economy as a whole, placing a special responsibility to the members of the board of directors
(Ibid, 2006).
The Bank for International Settlements (2006), defined the corporate governance in banks as
the methods & approaches used to manage banks through the board of directors and senior
management which determine how to put the bank's objectives, operation and protect the
interests of shareholders and stakeholders with a commitment to act in accordance with existing
laws and regulations and to achieve the protection of the interests of depositors.
In recent years, there has been an increasing global trend and need towards improved corporate
governance practices, accountability and responsibility.
But the term “corporate governance” has been identified to mean different things to different
people. As a result it has been defined differently in different ways:
Corporate governance is about commitment to values and about ethical business conduct. It is
about how an organization is managed. This includes its corporate and other structures, its
culture, policies and the manner in which it deals with various stakeholders. Corporate
governance is primarily the responsibility of the Board as a group. The Board performs its
duties with the support of managerial staff (La Porta, Lopez-de-Silance, and Shleifer 2002)
Magdi and Nadereh (2002) stress that corporate governance is about ensuring that the business
is run well and investors receive a fair return. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the corporation such as
the board, managers, shareholders and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs.
14
Effective corporate governance reduces “control rights” shareholders and creditors confer on
managers, increasing the probability that managers invest in positive net present value projects
(Shleifer and Vishny, 1997). Thus, the relationships of the board and the management,
according to Al-Faki (2006), should be characterized by transparency to shareholders, and
fairness to other stakeholders.
Corporate governance is an important concept that relates to the way and manner in which
financial resources available to the organization are judiciously used to achieve the over all
corporate objective of an organization, it keeps the organization in business and creates a
greater prospect for future opportunities. Corporate governance above all mitigates the agency
cost (Jensen and Meckling, 1976).
Corporate governance, according to Rock and et.al (1998), is the process by which a board of
directors through management guides a company in fulfilling its corporate mission and protects
the company’s assets over time. The board of directors on behalf of the shareholders is
established with the objective of providing oversight and guidance to the managers of a
company.
Melvin and Hirt (2005) described the concept of corporate governance as referring to corporate
decision-making and control, particularly the structure of the board and its working procedures.
And they add that corporate governance is also sometimes used very widely, embracing a
company’s relations with a wide range of stakeholders or very narrowly referring to a
company’s compliance with the provisions of best practice codes.
In addition, Thomas (2002) described corporate governance in the ways and means by which
the government of a company (the directors) is responsible to its electorate (the shareholders).
15
Corporate governance can also be stated as the set of rules and procedures that ensure that
managers do indeed employ the principles of value based management (Brigham and Ehrhardt
2005).
Shleifer and Vishny (1997) argued that corporate governance is the way in which suppliers of
finance to corporation ensure themselves of getting a return on their investments.
Nevertheless, corporate governance comprises a country’s private and public institutions, both
formal and informal, which together govern the relationship between the people who manage
corporations (corporate insiders) and all others who invest resources in corporations in the
county (Oman et al. 2003).
So to sum up, corporate governance is about how organization is managed. Specifically,
corporate governance is a relationship between shareholders (stockholders), board of directors
and managers (top management) in shaping the direction of the company in order to achieve a
sustainable performance. Moreover, corporate governance consists of external corporate
governance and internal corporate governance that serve public’s interest, employee’s interest,
and owner’s interest. More specifically, good corporate governance seeks to promote:
Efficient, effective and sustainable corporations that contribute to the welfare of the society
by increasing wealth, employment and solutions to emerging challenges
Responsible and accountable corporations
Legitimate corporations that are managed with integrity, probity and transparency
Recognition and protection of stakeholders’ rights
An inclusive approach based on democratic ideals, legitimate representation and

participation
16
2.2. Separation of Ownership and Management (Agency Relationship)

Allen and Gale (2001), states that the concept of corporate governance was born out of the
agency problem that arose when the ownership of companies became separated from the
control thereof. In most cases, small businesses are managed by owners, so there is less
separation between ownership and managerial control. As they grow in size and complexity,
owners may not have access to all of the skills needed to effectively manage. So owners may
contract with managerial specialists. These lead to hiring full time professional managers to
appropriately manage them. The complication and expansion in size may also need outside
capital and give up some of the ownership or calls for dispersion of ownership among
organized stock holders who are removed from the day to day management of the firm. In these
cases protection of the minority owners’ rights becomes important.
As owners of companies (principals) no longer controlled the management of companies, the
responsibility for control shifted to the directors (agents) of the company. The problem created
by this situation was that directors (or managers) of companies could abuse their control
function to their own advantage and to the detriment of the owners (Jensen and Meckling
1976).
In other words, as per Jensen and Meckling (1976), the separation of ownership and control
leads to the so called agency problem whereby management operates the firm aligning with
their own interests, not those of shareholders. This creates opportunities for managers to spend
firm resources maximizing their utilities rather than owners’ utilities. Corporate governance
was consequently introduced to ensure that the agents of the owners of companies control the
companies in the ways that will serve the interests of the shareholders of the company.
17
2.3. The interest of corporate governance in banks
The recent corporate failures world over has reinforced the importance of corporate
governance. It is important for investors to differentiate corporate on the basis of governance
principles in order to find out good from the bad. Uncouthly, corporate governance is need of
the hour. Its major contribution is enhancing the operating performance of the firm, and also
preventing the fraud (Yeh, Lee, and Ko, 2002). According to these writers, the global
consensus about the objective of good corporate governance is concerned with maximizing
shareholders value.
According to Black, Jang, and Kan (2007), companies with better corporate governance have
better performance than those with poor corporate governance. In addition, Jensen and
Meckling (1976), and Fama and Jensen (1983) have found that good corporate governance
really helps owners to exert control corporate affairs.
Moreover, Labie, (2003) (as sited by Frezer, 2006) states that for the most few years, corporate
governance principles have received more attention from academics and practitioners of the
banking field, particularly when dealing with the topics of long term sustainability and
institutionalization. There are several reasons for this trend.
1. The banking community has experienced some major failures, which in adequacy of
corporate governance is among others.
2. The tremendous growth and the institutionalization process experienced by some banks
have provided an interesting area for further research aimed at improving internal control
mechanisms, especially these linked to board actions.
18
3. The establishment of mutual funds as part of the shareholders structure and/or to connect
the banking organizations with capital markets has also played an important role.
The importance of institutionalizing and ensuring corporate governance in the banking sector
could be viewed from the nature of the business it self. Shleifer and Vishny (1997) argued that
banks are considered as vital institutions in any economy as they form an important source for
providing finance to businesses. In addition, the Basel Committee on Banking Supervision
(2006) points out that banks corporate governance is important as poor corporate governance
may result in bank failures thus endangering the stability of the financial system. Hence, banks
are regulated.
On the other hand, Berger et al. (2006) argues that since financial institutions particularly banks
manage other people’s money, their boards carry special responsibilities to maintain the value
of these resources.
Thus, it is only through institutionalizing and implementation of corporate governance that the
governance bodies could discharge their responsibilities as enshrined by laws and ensures that
the organization protects these resources.
2.4. Why bank corporate governance is different?

According to Visentini (1997), the Banking and financial sector is easily distinguishable from
the others. A few distinguishing features stand out:
• Unlike normal business entities which are funded mainly through shareholders’ funds; banks’
business involves funds raised mainly through deposits. The business of raising public
deposits places greater fiduciary responsibilities on the institution and its managers, since
depositors’ funds need to be safeguarded in a special way.
19
• Banks perform as financial intermediaries by lending and investing the funds mobilized and
funding economic activities of others.
• Banks are the agents of the payments system where they facilitate payments domestically and
internationally, through various instruments such as bank accounts, fund transfers, credit
cards, etc.
• Banks are able to undertake all such business operations as a result of public trust and faith in
the stability and soundness of the banks in particular and the system in general. The history on
bank failures in many countries indicates that loss of public confidence in banks could be
contagious and could easily lead to systemic banking crisis situations.
Overall, the banking business is the key for monetary conditions in a country. Bank deposit and
lending business determines the supply, cost and availability of money. Money is created by the
banking system through the legal tender issued by the Central Banks and/or Monetary
Authorities. Since sight money created is payable by banks at any time through legal tender and
technically, the banking system does not have funds adequate for meeting all such created
money at any particular point of time. Banking business thus casts a huge responsibility on the
monetary authorities to facilitate, regulate, and protect the banking and payments system
(Mishkin, 1992).
Banks corporate governance is important as poor corporate governance may result in bank
failures thus endangering the stability of the financial system. Furthermore, poor corporate
governance may lead to lost market confidence in the bank’s ability to manage its assets, which
may in turn trigger bank runs or liquidity crises (Basel Committee on Banking Supervision,
2006). Hence, banks are regulated. In a more direct sense, weaknesses in CG arrangements in
20
banks reduce their capacity to identify, monitor and manage their business risk and that can
result in poor quality lending and excessive risk-taking by the financial institutions. Depending
on the resilience of the financial institutions and markets, these risks have the potential to
spread across the wider financial system.
2.5. Over view of the Corporate Governance Theories
2.5.1. Fundamental Corporate Governance Theories
2.5.1.1. Agency Theory
Agency theory having its roots in economic theory was exposited by Alchian and Demsetz
(1972) and further developed by Jensen and Meckling (1976). Agency theory is defined as “the
relationship between the principals, such as shareholders and agents. In this theory,
shareholders who are the owners or principals of the company, hires the gents to perform work.
Principals delegate the running of business to the directors or managers, who are the
shareholder’s agents (Clarke, 2004). The agency theory shareholders expect the agents to act
and make decisions in the principal’s interest. On the contrary, the agent may not necessarily
make decisions in the best interests of the principals (Padilla, 2000).
2.5.1.2. Stewardship Theory
21
Stewardship theory has its roots from psychology and sociology and is defined by Davis,
Schoorman & Donaldson (1997) as “a steward protects and maximizes shareholders wealth
through firm performance, because by so doing, the steward’s utility functions are maximized”.
In this perspective, stewards are company executives and managers working for the
shareholders, protects and make profits for the shareholders. Unlike agency theory, stewardship
theory stresses not on the perspective of individualism (Donaldson & Davis, 1991), but rather
on the role of top management being as stewards, integrating their goals as part of the
organization. The stewardship perspective suggests that stewards are satisfied and motivated
when organizational success is attained. Agyris (1973) argues agency theory looks at an
employee or people as an economic being, which suppresses an individual’s own aspirations.
However, stewardship theory recognizes the importance of structures that empower the steward
and offers maximum autonomy built on trust
2.5.1.3. Stakeholder Theory
Stakeholder theory can be defined as “any group or individual who can affect or is affected by
the achievement of the organization’s objectives”. Unlike agency theory in which the managers
are working and serving for the stakeholders, stakeholder theorists suggest that managers in
organizations have a network of relationships to serve – this include the suppliers, employees
and business partners (Freeman, 1984).
2.5.1.4. Resource Dependency Theory
Whilst, the stakeholder theory focuses on relationships with many groups for individual
benefits, resource dependency theory concentrates on the role of board directors in providing
access to resources needed by the firm. Hillman, Canella and Paetzold (2000) contend that
22
resource dependency theory focuses on the role that directors play in providing or securing
essential resources to an organization through their linkages to the external environment.
2.5.1.5. Transaction Cost Theory
Transaction cost theory was first initiated by Cyert and March (1963) and later theoretical
described and exposed by Williamson (1996). Transaction cost theory was an interdisciplinary
alliance of law, economics and organizations. This theory attempts to view the firm as an
organization comprising people with different views and objectives. The underlying
assumption of transaction theory is that firms have become so large they in effect substitute for
the market in determining the allocation of resources.
2.5.1.6. Political Theory
Political theory brings the approach of developing voting support from shareholders, rather by
purchasing voting power. Hence having a political influence in corporate governance may
direct corporate governance within the organization. Public interest is much reserved as the
government participates in corporate decision making, taking into consideration cultural
challenges (Pound, 1993).
2.5.2. Ethics Theories of Corporate Governance
Other than the fundamental corporate governance theories of agency theory, stewardship
theory, stakeholder theory, resource dependency theory, transaction cost theory and political
theory, there are other ethical theories that can be closely associated to corporate governance.
23
These include business ethics theory, virtue ethics theory, feminist ethics theory, discourse
ethics theory, postmodern ethics theory.
2.5.2.1. Business ethics theory
Business ethics is a study of business activities, decisions and situations where the right and
wrongs are addressed. The main reasons for this are the power and influence of business in any
given society is stronger than ever before. Businesses have become a major provider to the
society, in terms of jobs, products and services. Business collapse has a greater impact on
society than ever before and the demands placed by the firm’s stakeholders are more complex
and challenging. Business ethics helps us to identify benefits and problems associated with
ethical issues within the firm and business ethics is important as it gives us a new light into
present and traditional view of ethics (Crane and Matten, 2007).
2.5.2.2. Feminist ethics theory
This theory emphasizes on empathy, healthy social relationship, loving care for each other and
the avoidance of harm. In an organization, to care for one another is a social concern and not
merely a profit centered motive. This is important as an organization is a network of actions,
hence influencing transcommunal levels and interactions (Casey, 2006).
2.5.2.3. Discourse ethics theory
This theory is concerned with peaceful settlement of conflicts. Discourse ethics, also called
argumentation ethics, refers to a type of argument that tries to establish ethical truths by
investigating the presuppositions of discourse (Habermas, 1996). Meisenbach (2006) contends
24
that such kind of settlement would be beneficial to promote cultural rationality and cultivate
openness.
2.5.2.4. Virtue ethics theory
This theory focuses on moral excellence, goodness, chastity and good character. Virtue is a
state to act in a given situation. It is not a habit as a habit can be mindless (Annas, 2003).
Aristotle calls it as disposition with choice or decision. Virtue involves two aspects, the
affective and intellectual. The concept of affective in virtue theory suggests “doing the right
thing and have positive feelings”, whilst, the concept of intellectual suggests “to do virtuous act
with the right reason”.
2.6. Review of related literature on corporate governance
The researcher attempted to review some empirical and theoretical literature in the area of
corporate governance.
One study in South Africa identified three key broad areas that impact on corporate
governance. These are political and legal governance in Africa, regulating payment disclosure
and the need for an effective and sound regulatory framework (Okeahalam, 2004). While
ownership is now more widely diffuse, the control of companies that account for a large
proportion of the capitalization still remains fairly concentrated in the hands of a number of
founding families (Okeahalam, 2004).
McKinsey (2000) found that a significant majority of investors say they are willing to pay a
premium for a well-governed company. The opinion survey defines a well governed company
as one with a majority of outside directors who are truly independent of management ties, have
25
significant shareholdings, are very responsive to investor requests, have a formal director
evaluation in place and where the material proportion of directors’ pay is stock-related.
Another study in Bahrain found that Bahraini companies have in place some of the features of
international corporate governance ‘best practice.’ For example, boards are dominated by non-
executive directors, and there is a separation in the roles of Chairperson and CEO, but that there
remains further progress to be made (Hussain & Mallin, 2002).
2.7. Introducing Corporate Governance in Ethiopia
The Ethiopian economy is at a stage of transformation. Reforms during the last couple of
decades brought market economy, privatization of state owned enterprises and openings in the
financial system. Developments of the latest few years indicate a new phase of economic
progress. There is a noticeable increase of exports. There is an emerging trend in the financial
system from the purely collateral based lending to performance based financing of businesses.
Over the past couple of years, ambitious investors are seen raising large amounts of capital
from the public through offers of shares in new business ventures2. All these indicate the
emergence of new types of relations between and among businesses, investors, suppliers, and
customers.
These new trends and changes in the Ethiopian economy and business environment would
need, there for, to be followed up by major changes in the way of conducting business in the
country. Good corporate governance in its broad sense will be essential. Without it, necessary
2
Taken from http://www.ethiopiainvestor.com/index.php?option=com-content and task
26
new relations between businesses, investors, financiers and foreign customers would not take
place and economic development will be slower.
Corporate Governance would benefit Ethiopian business in several ways. It would facilitate
access to capital through the banking system and other financial institutions by making
company performance visible and reliable. Through increased transparency and better conduct
of businesses, Corporate Governance may also lower the costs of capital by reducing the “risk
premium” normally added by creditors to borrowing. Application of good standards or
principles to company’s affairs improves the control of the business transactions and increases
efficiency. In other words: good corporate governance leads to good business.
Introduction and development of Corporate Governance in Ethiopia is therefore a necessary
but “revolutionary” change in the ownership philosophies, management and operations of
Ethiopian companies. It would help to dissolve financial and market access blockages but at the
same time place far reaching requirements for revision of business practices by companies
aiming at growth and prosperity for their owners and stakeholders.
2.8. Review of International Corporate Governance Principles

The immediate need for good corporate governance arises due to the inherent potential
conflicts between different stakeholders in a corporate structure. This is usually referred to as
the principal–agent problem, the most prominent of which is the potential misalignment of
interests between the ownership (principal) and management (agent) of a company. Corporate
governance aims at minimizing the possibility of conflicts by increasing the transparency of
decision making processes and the accountability of management by installing various control
mechanisms (e.g. audit committee, board of directors, shareholder meetings). A good corporate
27
governance framework is essential for the efficient allocation of capital. Through enhanced
disclosure and transparency, such a framework provides market confidence, attracts long-term
capital and supports market discipline (Shleifer and Vishny, 1997).
The principles of corporate governance started a new process of development since the 1980’s.
Since the late 1980’s, the relationship of financial structures of companies with respect to
corporate governance, and the susceptible economic effects caused consequently began to be
examined. The principles of the corporate governance are institutions which protect the
shareholders' rights and decrease the information asymmetry. The principles as institutions are
the rules of the game or in other words they imposed constraints which shape the interactions
between actors. They diminish the levels of the freedom of action, but decrease the uncertainty
and the insecurity (Claessens, 2006).
The principles of corporate governance “are evolutionary in nature and should be reviewed in
light of significant changes in circumstances”. It is also recognized that, “To remain
competitive in a changing world, corporations must innovate and adapt their corporate
governance practices so that they can meet new demands and grasp new opportunities” (OECD,
2005).
2.8.1. OECD Principles of Corporate Governance

The OECD (Organization for Economic Co-operation and Development) Principles of
Corporate Governance were endorsed by OECD Ministers in 1999 and have since become an
international benchmark for policymakers, investors, corporations and other stakeholders
worldwide. The OECD Council Meeting at Ministerial Level in 2002 agreed to survey
developments in OECD countries and to assess the principles in light of developments in
28
corporate governance. Consequently, in 2004, the Principles of Corporate Governance of 1999
were revised to take into account new developments and concerns. It was agreed that the
revision should be pursued with a view to maintaining a non-binding principles-based
approach, which recognizes the need to adapt implementation to varying legal economic and
cultural circumstances (OECD, 2004).
The following are the OECD Principles of Corporate Governance:
1. The corporate governance framework should promote transparent and efficient markets, be
consistent with the rule of law and clearly articulate the division of responsibilities among
different supervisory, regulatory and enforcement authorities.
2. The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights.
3. The corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should have the
opportunity to obtain effective redress for violation of their rights.
4. The corporate governance framework should recognize the rights of stakeholders established
by law or through mutual agreements and encourage active co-operation between corporations
and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
5. The corporate governance framework should ensure that timely and accurate disclosure is
made on all material matters regarding the corporation, including the financial situation,
performance, ownership, and governance of the company.
29
6. The corporate governance framework should ensure the strategic guidance of the company,
the effective monitoring of management by the board, and the board’s accountability to the
company and the shareholders (OECD, 2004).
2.8.2. Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision (the Basel Committee) published guidance in
1999 to assist banking supervisors in promoting the adoption of sound corporate governance
practices by banking organizations in their countries. This guidance drew from the Principles of
Corporate Governance that were published earlier that year by the OECD with the purpose of
assisting governments in their efforts to evaluate and improve their frameworks for corporate
governance and to provide guidance for financial market regulators and participants in financial
markets.
In 2005, the Basel Committee revised the 1999 Corporate Governance guidance and prepared a
consulting document on Enhancing Corporate Governance for Banking Organizations.
The following are the principles put forward in that document:

• Principle 1: Board members should be qualified for their positions, have a clear understanding
of their role in Corporate Governance and be able to exercise sound judgment about the affairs
of the bank.
• Principle 2: The board of directors should approve and oversee the bank’s strategic objectives
and corporate values that are communicated throughout the banking organization.
30
• Principle 3: The board of directors should set and enforce clear lines of responsibility and
accountability through the organization.
• Principle 4: The board should ensure that there is appropriate oversight by senior management
consistent with board policy.
• Principle 5: The board and senior management should effectively utilize the work conducted
by the internal audit function, external auditors, and internal control functions.
• Principle 6: The board should ensure that compensation policies and practices are consistent
with the bank’s corporate culture, long-term objectives and strategy, and control environment.
• Principle 7: The bank should be governed in a transparent manner.
• Principle 8: The board and senior management should understand the bank’s operational
structure, including where the bank operates in jurisdictions, those that may impede
transparency (i.e. “know-your-structure”).
It is very clear today, more than ever, that Regulators also have a key role to play in achieving
good Corporate Governance. In general, all regulations, in the Banking System, are intended in
one way or another, to enforce prudential requirements on key areas of affairs of institutions to
mitigate identified risks. Regulations on ownership, related party transactions, and fitness and
propriety tests for directors are directly based on modern Corporate Governance principles (the
Basel Committee on Banking Supervision, 2005).
The Basel Committee further recommends that Corporate Governance should be promoted by
other stakeholders as well. For instance,
• Shareholders – through the active and informed exercise of shareholder rights;
• Depositors and other customers – by not conducting business with banks that are operated in
an unsound manner;
31
• Auditors – through a well-established and qualified audit profession, audit standards and
communications to boards of directors, senior management and supervisors;
• Banking industry associations – through initiatives related to voluntary industry principles and
agreement on and publication of sound practices;
• Professional risk advisory firms and consultancies – through assisting banks in implementing
sound Corporate Governance practices;
• Governments – through laws, regulations, enforcement and an effective judicial framework;
• Credit rating agencies – through review and assessment of the impact of Corporate
Governance practices on a bank’s risk profile;
• Securities regulators, stock exchanges and other self-regulatory organizations – through
disclosure and listing requirements; and
• Employees – through communication of concerns regarding illegal or unethical practices or
other Corporate Governance weaknesses.
2.9. Applicability of the Principles of Corporate Governance
Application of corporate governance principles provide a control mechanism of the company
operations and thus encourage the managers to be more successful and promote the company’s
performance with long-term strategies3.
The OECD Principles and the Basel committee for banking supervision represent the minimum
standard on which countries with different traditions could agree, without being unduly
3
Taken from the free encyclopedia Wikipedia, the http://en.wikipedia.org
32
prescriptive. They are meant to be equally applicable to countries regardless of prevailing
ownership structures, a civil or common-law tradition or the dominant model of board
representation.
In a global context, dispersed ownership structures are the exception rather than the rule.
Whether the firms are family-controlled companies, state-owned firms or financial-industrial
groups with cross-shareholdings, every system creates different agency problems and therefore
different corporate governance challenges. Another source of differences in corporate
governance perspectives stems from differing legal traditions that vary substantially, mainly
between countries with common law and countries with civil law traditions. Lastly, cultural
differences play an important role(http://en.wikipedia.org).
Hence, the OECD and the Basel committee for banking supervision acknowledges: “The
Principles are non-binding and do not aim at detailed prescriptions for national legislation.
Rather, they seek to identify objectives and suggest various means for achieving them. Their
purpose is to serve as a reference point.” Moreover, the OECD Principles explicitly state that
the "desirable mix between legislation, regulation, self-regulation, voluntary standards, etc. in
this area will vary from country to country.”
2.10. Relevant Laws and Directives on Corporate Governance in Ethiopia

The government of Ethiopia has proclaimed laws to guide the corporate governance of banks in
the country.
Moreover, these laws and directives can be discussed in detail here below:
2.10.1. Commercial Code of Ethiopia 1960
33
The Commercial Code of Ethiopia (1960) has relevant provisions on corporate governance.
The part which is related to share companies is Articles 304-428, where shares and rights and
duties of shareholders, directors, auditors and shareholder meetings are clearly stipulated.
Summary of the provision may include the following
Shares and rights and duties of share holders (Art.325)
Shares shall be registered in the name of the share holder where the bearer shares are prohibited
by law, the memorandum or articles of association
Register of share holders (Art.331) - Every company shall keep at its head office a register of
share holders, the register shall contain the names and address of the share holders, the number
and numeration of shares, the amount paid up and the date of entry of the share holder in the
register. The register may be inspected by any share holder without charge, it may also be
inspected any other person up on payment of the prescribed amount.
Classes of shares (Art.335) - All share of the same class shall have the same par value and the
same right.
Preference of shares (Art.336) -The issue of shares with a preference as to voting right is
prohibited.
Rights arising out of shares (Art.345) - Every share shall confer a right to participation in the
annual net profits and to a share in the net proceed on the winding- up, and to allotment of cash
shares issued on an increase of capital.
Directors, Auditors and share holders’ meetings
34
Directors (Art.347) - Only members of a company may manage the company. A company shall
have not less than three or more than twelve directors who shall form a board of directors.
Appointment of directors (Art.351) - The first directors may be appointed under a
memorandum of association and submitted to the meeting of subscribers for confirmation.
Subsequent directors shall be appointed by a general meeting. Directors may not be appointed
for more than three years.
Rights of a minority (Art.352) - Where there are several groups of share holders with a
different legal status, the articles of association shall provide for each group to elect at least one
representative on the board of directors.
Remuneration (Art.353) - Directors may receive fixed annual remunerations, or share in the net
profit (not exceeding 10 %.) the amount of which shall be determined by a general meeting and
charged against general expenses.
Removal (Art354) - Notwithstanding any provision to the contrary, directors may be removed
at any time by a general meeting, provided that a director who was removed without good
cause may claim compensation.
Decisions of board of directors (Art.358) - No decision may be taken by the board of directors
unless a majority of directors is present.
Powers of directors (Art.363) - The directors shall have such powers as are given to them by
law, the memorandum or articles of association and resolutions passed at meetings of share
holders.
Nomination and Appointment of Auditors (Atr368 &369) - Auditors shall be elected by the
meeting of subscribers and thereafter by the annual general meeting.)
35
Persons Not competent (Art370) - Auditors may not be appointed directors or managers of the
company which they audit, nor one of its subsidiaries or its holding company within three years
from the date of the termination of their functions.
2.10.2. The Banking Business Proclamation No. 592/2008

As per the Art.10 of the proclamation, bank share shall be of one class and shall be registered
as ordinary shares of the same par value. It also proclaims that every bank shall keep register of
shares as determined by the NBE which shall show the names and voting right of share holders.
Any transfer of shares that makes any person influential share holder shall be approved by the
NBE before such transfer is recorded in the register of shares.
Article12 authorizes NBE to assign observers to attend any general share holders’ meeting, and
where it finds necessary to call general share holders meetings of the bank.
According to Art14, a Director shall be of a person with honesty, integrity, diligence and
reputation to the satisfaction of NBE. The appointment of any director, CEO, senior executive
officer of a bank may not be valid unless a written approval is granted by NBE. The NBE may
issue directives on qualification of competency, minimum number of directors, duties,
responsibilities and good corporate governance of the bank, the maximum number of years a
director may serve and condition for his re-election, and maximum number the employees that
may serve on the board.
As per Art.15 persons convicted of any offence involving breach of trust or fraud is prohibited
from getting appointed as directors and officers.
36
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
This chapter presents methods used in carrying out the study. In particular, this study was
employed in order to describe the extent to which corporate governance principles are applied
in the Ethiopian private commercial banks, the case of LIB. It presents the research design,
37
procedures of data collection, the instruments used to gather the necessary data, the sampling
procedure and finally method of data analysis and presentation.
3.1. Research Design
The research design used may vary from research to research. The type of research employed
for the purpose of this study is descriptive in nature, because, the researcher has no control or
effect on the variables of the study. It was intended only to investigate the extent to which
corporate governance principles are implemented in the Ethiopian private commercial banks,
the case of LIB.
Descriptive study is helpful when a researcher wants to look into a phenomenon or a process in
its natural contexts in order to get its overall picture instead of taking one or some of its aspects
and manipulating it in a simulated or an artificial setting (Seiliger and Shohamy 1989;
McDonough 1997). Thus, descriptive study was chosen to investigate the extent of the
implementation of the corporate governance principles in banks from a holistic perspective in
its natural settings. Moreover, in order to achieve the intended objective, both quantitative and
qualitative methods were chosen.
Hence, the convenient research design considered suitable for this study was descriptive case
study.
3.2. Sources of Data and Sampling Techniques

3.2.1. Source of data
Data were collected both from the primary and secondary sources. The target populations of
this study for the primary data were the board members and senior manager and the board
secretary of the LIB.
3.2.2. Sampling Population

38
Based on the information found from the National Bank of Ethiopia, there were a total of 11
board members for the LIB. All of them were taken as a target population for the purpose of
this study. And the other target population of the study was the bank’s senior manager and the
board secretary. In other ways, a population census was used to make the research. In a
nutshell, a total of 18 participants, the board members and the senior manager and the board
secretary were involved in the study.
Finally, the kind of sampling techniques used for the selection of the participants so as to
conduct this research was comprehensive and purposive sampling for the questionnaire and
interview respectively.
3.3. Development of Research Instruments and Data Collection Procedures
To make the research out put thorough, a triangulated list of methods of data collection
instruments were employed. The data were collected both from the primary data sources (using
questionnaire and interview) and the secondary data sources. As Moser and Kalton (1972)
suggests, the use of different instruments for a study provides a powerful research strategy. As
part of the primary data, a comprehensive questionnaire (a copy was placed as appendix A at
the end of the report) was designed and distributed to all board members of the target bank. In
addition, interview with five board members, the senior manager and the board secretary was
conducted to obtain detailed information.
And as part of secondary data, publicly available information like annual report of the bank,
commercial code of Ethiopia, proclamation and directive issued by the National Bank of
Ethiopia to regulate and supervise the bank’s governance will be accessed. Moreover,
literatures related to the subject were exploited from the internet.
39
3.3.1. Questionnaire
Questionnaire is a research instrument consisting of a series of questions and other prompts for
the purpose of gathering information from respondents4. Questionnaires have advantages over
some other types of surveys in that they are cheap, do not require as much effort from the
respondent and often have standardized answers that make it simple to compile data.
3.3.1.1. Design of the questionnaire
Most of the questions in the questionnaire were developed from the review of related literature.
Therefore, the questionnaire was prepared, completed and returned to the researcher. The
questionnaire had two parts. The first part was dealt with the personal information of the
respondents.
And the second part of the questionnaire was about questions concerning the corporate
governance principles. This was further divided in to five sub-parts. The first sub-part was dealt
with developing a culture of good corporate governance through out the bank. There were a
total of 5 items presented in this sub-part in which all them were ‘Yes’ ‘No’ questions.
The second sub-part of the questionnaire contained 6 items which were designed for the
purpose of looking in to the extent to which the board is discharging its roles and
responsibilities. All of these items were evaluated using a Likert scale. The Likert scales were:
‘Strongly disagree’, ‘Disagree’, ‘Un decided’, ‘Agree’ and ‘Strongly agree’. Accordingly, the
respondents were asked to use the scales in order to show their agreement or disagreement with
the given statements. The third sub-part was comprised of 5 items intending to investigate the
4
Taken from the free encyclopedia Wikipedia, the http://en.wikipedia.org/wiki/Questionnaire
40
extent to which the bank ensures the efficiency and effectiveness of the board. All of them were
‘Yes’ ‘No’ questions.
The fourth and fifth sub-parts were also dealt with the rights of shareholders and other
stakeholders and the roles and responsibilities of the board committees of the bank respectively.
5 and 10 items were contained in each sub-part respectively. And all of the items were rated by
use of the Likert scales; ‘Strongly disagree’, ‘Disagree’, ‘Un decided’, ‘Agree’ and ‘Strongly
agree’. The last sub-part was about transparency and disclosure containing 5 items in which all
of them were ‘Yes’ ‘No’ questions.
3.3.2. Interview
Interview was the other type of data collection instrument used in the study. This means of data
collection instrument helps the researcher to get reliable information from the target population
that how they feel and think about the problem. Interview according to Arikunto (2002) is a
kind of dialogue which is done by an interviewer to get reliable information from an
interviewee.
Consequently, the purpose of the interview was to substantiate the results obtained from the
questionnaire thereby to get a greater depth of information. The interview questions were
prepared in a semi structured type. There were a total of 15 questions asked to five board
members, the senior manager and the board secretary of the bank.
3.4. Data Collection Procedure
The researcher adopted three steps in collecting the data for the study. First, relevant literature
was reviewed to get adequate information on the topic. Second, objectives and research
questions were formulated to show the direction of the study. Third, data gathering tools were
41
developed and piloted. After the questionnaire was distributed and collected, interview with the
senior manager of the bank was conducted.
3.5. Method of Data Analysis and Presentation
Once after the raw data was on hand, quantitative and qualitative methods of data analysis were
used. Particularly with the quantitative data collected via the questionnaire, a descriptive
statistical analysis method and SPSS was used to tabulate the data and present it in tables.
Information obtained from the open-ended questions was also analyzed to gather with the
close-ended questions and used as supplementary data, to triangulate the responses gathered via
the questionnaire in general.
Moreover, to analyze the data obtained through interview qualitative method of data analysis
was employed. Perhaps, the data gained through this method was used to back the information
gathered via the main tool of the research, which is the questionnaire, and, hence no separate
section was dedicated to it.
3.6. Ethical Consideration

Before the research was conducted on the selected bank, the researcher informed the
participants of the study about the objectives of the study, and was consciously consider ethical
issues in seeking consent, avoiding deception, maintaining confidentiality, respecting the
privacy, and protecting the anonymity of all respondents. A researcher must consider these
42
points because the law of ethics on research condemns conducting a research without the
consensus of the respondents for the above listed reasons.
CHAPTER FOUR
4. PRESENTATION AND DISCUSSION OF THE DATA

4.1. Introduction
This study was, as described in the aforementioned chapter, aiming at investigating the extent
to which corporate governance principles are implemented in the Ethiopian privet commercial
43
banks, the case of LIB. The data were collected from the board members, the senior manager
and the board secretary of the bank. To gather relevant data for the purpose of the study,
questionnaire and interview means of data instruments were employed. Therefore, the data
collected from the target population of the study through these instruments were presented and
discussed in this chapter.
In this section, the collected data were discussed, analyzed, presented. In doing so, the data
gathered through the questionnaire were presented in tables. Apart from this, the data collected
through interview were merged together and interpreted with the result of the questionnaire.
This chapter generally consists of presentation of the statistical results obtained, illustrated
tables, discussions of the results obtained from the questionnaire and interview of the target
population.
4.2. Data obtained through questionnaire and interview
A closed-ended questionnaire of 37 items with open-ended questions was prepared in English
and administered to the board members. Accordingly, they gave their responses about the
extent of the implementation of the corporate governance principles in the Ethiopian private
commercial banks, the case of LIB. Therefore the data found from the respondents were
analyzed and discussed in line with the research questions as follows. The researcher also used
interview method of data gathering technique to triangulate with the results of the data found
from the questionnaire and to validate the reliability of the results eventually. When the data
found from the questionnaire were analyzed, the data obtained from interview were also
discussed and interpreted together with the result of the questionnaire.
44
Generally speaking, the data obtained from the questionnaire were analyzed and interpreted
together with the data found from interview below in the following consecutive tables.
4.3. Presentation and Analysis of data obtained through questionnaire and

interview
4.3.1. Personal information
Table 4.3.1.1. Age group
Age Frequency Percentage
30 to 45 4 46.4
46 to 60 6 54.5
60 or older 1 9.1
Total 11 100
It can be observed from table 1 above that 36.4%, 54.5%, and 9.1% of the respondents were
between 30 to 45, 46 to 60 and 60 or older respectively. The result is consistent with what is
stated in the new directive Banking Business Proclamation 592/2008 issued by the National
Bank of Ethiopia that a member of the board of a bank has to be at least 30 years old.
Table4.3.1.2. Level of educational qualification
Qualification Frequency Percentage
Diploma 1 9.1
Degree 3 27.3
45
Master 6 54.5
PHD 1 9.1
Total 11 100
Table3 above shows that 90.9% of the respondents own degree and above which is a good
indication that the Bank is staffed by educated people. It meets the National Bank’s 2008
directive, which requires that at least 75% of a bank's board members hold a minimum of a first
degree or equivalent from a recognized higher learning institution. The remaining board
members should at least have completed general secondary school.
The interview result also indicated that the above requirement set by the National Bank has
resulted in the selection of directors with good academic preparation and experience. This has
improved understanding between management and members of the Board. Moreover, the
professional mix of the directors is diverse and relevant as there are business management
graduates, finance graduates, economics, and engineering graduates.
Table4.3.1.3. Work experience
Years Frequency Percentage
11 to 20 3 27.3
21 to 30 5 45.5
31 and above 3 27.3
Total 11 100
A National Bank of Ethiopia directive clearly stipulates that members of a board should have
adequate managerial experience, preferably in banking and/or should undergo adequate training
in banking business management when holding a seat on the board.
46
As it can be observed from table4 above the respondents have professional work experience of
11 years and above. This enables the directors to have a clear understanding of their role in
corporate governance, which is one of the critical elements of corporate governance (Basel,
2005). This clearly indicates that the Board, by and large, has ample experience in the duties,
powers and liabilities of directors.
4.3.2. About the corporate governance principles
Table 4.3.2.1.Frequency and Percentage Values of developing a culture of
good governance through out the bank
Criteria Yes No
F % F %
1. Internal controls and procedures 9 81.8 2 18.2
2. Code of business ethics 10 90.9 1 9.1
3. Corporate governance committee 11 100
4. Compliance department 9 81.8 2 18.2
5. Employee awareness creation program 7 63.6 4 36.4
► ‘F’ stands for frequency and ‘%’ stands for valid percentage value
As shown from table 4.3.2.1 different criteria that can be used to evaluate the development of a
culture of corporate governance were listed and the respondents were asked whether or not they
are practically used in the bank. Accordingly, the frequency distribution and percentage value
of the usage of these criteria is presented as follows.
The first criterion as shown in the above table is ‘establishing internal controls and procedures’.
According to Melvin and Hirt (2005), a corporation should have an effective system of internal
controls providing reasonable assurance that the corporation's books and records are accurate,
47
that its assets are safeguarded and that it complies with applicable laws. An effective internal
control system contributes to safeguard the company’s assets, the efficiency and effectiveness
of business transactions, the reliability of financial information, the compliance with laws and
regulations. The internal controls system should be periodically evaluated and updated so that it
continues to be effective in a changing environment.
In this respect, the survey indicates that 81.8% of the respondents said ‘Yes’, indicating that
this criterion is practically applied in the bank aiming at governing the work and behavior of its
departments. On the other hand, the remaining 18.2% of the total respondents replied ‘No’.
That means majority of the respondents revealed that the bank establishes internal controls and
procedures. However, the ‘No’ response should not be discarded as they can high light the
problem in the bank. In addition, the analysis from the secondary data (from the annual report)
portrayed that the bank establishes internal controls and procedures
The Basel Committee for Banking Supervision (2005) recommends that banking organizations
should maintain written code of business conduct with effective reporting and enforcement
mechanisms. Employees should have a means of alerting management and the board to
potential misconduct without fear of retribution, violations of the code should be addressed
promptly and effectively. And it should be posted on the organization’s website.
According to the above table, criterion number 2, ‘existence of Code of Business Ethics’ is also
answered by almost all of (90.9%) of the total respondents as ‘Yes’ in contrast to the remaining
9.1%, in deed should not be underestimated, of the respondents who replied as ‘No’. But given
the respondents were asked whether or not the Code of Business Ethics, if any, is published on
the bank’s website in the open ended question part, they respond as it is not yet published.
48
The other criterion shown in the above table is criterion number 3 which asserts ‘creating
corporate governance committee’. As can be seen from that table, all of the respondents replied
as ‘Yes’ that the board creates corporate governance committee whose mandate includes
monitoring whether the bank is fulfilling its commitments to good governance. From the above
data, it is therefore, possible to say that creating corporate governance committee as one of the
different criteria shown above that can be used to develop a culture of good governance was
applied in the bank.
Similarly, among the criteria presented in the same table, having formal ‘Compliance
Department’ criterion number 4 is responded by 81.8% of the total respondents. The result
designates that the bank has a formal ‘Compliance Department’, they respond as ‘Yes’. Only
18.2% of the respondents responded as ‘No’ confirming that this criterion is no not applied. In
addition to the response obtained from the questionnaire, the result of the interview also
revealed as the bank does have formal Compliance Department.
The existence of compliance department in any organization allows investors and other
stakeholders’ greater access to information about the corporation and is to be encouraged.
Where there is a local code on corporate governance, enterprises should follow a “comply or
explain” rule whereby they disclose the extent to which they followed the local code’s
recommendations and explain any deviations. Where there is no local code on corporate
governance, companies should follow recognized international good practices. In relation to
this “comply or explain” rule, some countries now require companies with foreign listings to
disclose the extent to which the local governance practices differ from the foreign listing
standards.
49
Criterion number 5, ‘an on-going program to raise employee’ awareness’ is replied by most of
the respondents (63.6%) that the bank does have. On the other hand, the remaining 36.4% of
the respondents responded as ‘No’ that this criterion is not applied. In addition to the response
obtained from the questionnaire the result of the interview revealed that as this criterion is
effectuated so far in the bank.
The Basel Committee for the Banking Supervision suggests that shareholder value is enhanced
when a corporation treats its employees well, serves its customers well, maintains good
relationships with suppliers, and has a reputation for civic responsibility and legal compliance.
As a result, corporations should do their best to enhance their employees’ awareness of
corporate governance.
Table 4.3.2.2.Frequency and Percentage Values of roles and responsibilities of the

board
Criteria 1 2 3 4 5
50
F % F % F % F % F %
1. Approves a set of performance 2 18.2 3 27.3 6 54.5
Indicators
2. Approves and monitors strategic 1 9.1 2 18.2 5 45.5 3 27.3
objectives of the bank
3. Ensures that the executive 2 18. 1 9.1 7 63.6 1 9.1
management implements the 2
strategic
policies of the bank
4. Has a sound understanding of risks of 4 36.4 6 54.5 1 9.1
the bank
5. Conducts annual meetings in a way 2 18.2 6 54.5 3 27.3
that shareholders are able easily ask
questions
6. Provides to all its shareholders to all 2 18.2 4 36.4 5 45.5
its shareholders sufficient and timely
information
As shown in the above table 4.3.2.2, a number of criteria regarding the roles and
responsibilities of the board are identified and the respondents were asked to portray the level
of their agreement. This perhaps describes the extent to which the board is discharging its roles
and responsibilities in the bank.
Accordingly, the data found from this aspect as the table depicts above criterion number 1
discusses about ‘the board responsibility to officially approve a set of key performance
indicators, which can be used to measure the bank’s progress and also the performance of the
management team’. Bearing this point in mind, it is therefore, criterion number 1 in the table
51
portrays that 18.2%, 27.3% and 54.5% of the respondents replied as undecided, agree and
strongly agree respectively. This criterion is therefore revealed by majority of the respondents
as it has been carried out by the board, they show their agreement.
Where executive directors and key personnel are eligible for performance-related incentives,
their compensation should be subject to relevant and objective conditions designed to enhance
long-term corporate value. The Board must identify key risk areas and key performance
indicators of the corporation’s business such as economic value added and should constantly
monitor these factors (OECD 2005).
In response to criterion number 2 as shown in the above table which states about ‘the board
approves and monitors strategic objectives of the bank and the values and standards of work
with the interests of stakeholders’ 9.1%, 18.2%, 45.5% and 27.3% of the total respondents
revealed that they were strongly disagree, disagree, agree and strongly agree respectively. From
this result as can be seen from the table, majority of the respondents replied that the board
undertaken its responsibility.
According to the Basel Committee for Banking Supervision (2004), it is difficult to conduct the
activities of an organization when there are no strategic objectives or guiding corporate values.
Therefore, the board should establish the strategic objectives and ethical standards that will
direct the ongoing activities of the bank, taking into account the interests of stakeholders.
The third criterion indicated in the above table also asserts about ‘the board ensures that the
executive management implements the strategic policies of the bank and prevent the activities
and relationships and attitudes that undermine governance’ is responded by 18.2%, 9.1%,
63.6% and 9.1% of the respondents that they were disagree, undecided, agree and strongly
52
agree respectively. Therefore, as the result shows more than half of the respondents show their
agreement as the board ensures that the executive management implements the strategic
policies of the bank and prevent the activities and relationships and attitudes that undermine
governance.
Given respondents were asked to specify some of the activities and relationships and attitudes
that undermine or diminish governance in the open-ended question, they forwarded the
following:
Conflicts of interest
Lending to officers, employees or directors (i.e. where allowed by national law). Where
internal lending occurs, it should be limited to lending consistent with market terms or
terms offered to all employees and may be restricted to certain types of loans, reports of
insider lending should be provided to the board, and such lending should be subject to
review by internal and external auditors and supervisors; and
Providing preferential treatment to related parties and other favored entities (e.g. lending on
favorable terms, covering trading losses, waiving commissions).
In reply to criterion number 4 in the table also depicts about ‘the board has a sound
understanding of risks of the bank and ensures that management has established strong systems
to monitor those risks’. With regard to this criterion, more than half of the respondents (63.6%)
show their agreement that the board has a sound understanding of risks of the bank and ensures
that management has established strong systems to monitor those risks, answered as agree
(54.5%) and strongly agree (9.1%) respectively. On the other hand, the remaining 36.4% of the
respondents were still unable to decide with regard to this problem.
53
OECD recommends that the board should present a balanced and understandable assessment of
the company’s position and prospects. The board should determine the nature and extent of the
significant risks it is willing to take in achieving its strategic objectives. It should also maintain
sound risk management and internal control systems. The board should establish formal and
transparent arrangements for considering how they should apply the corporate reporting and
risk management and internal control principles and for maintaining an appropriate relationship
with the company’s auditor.
The other criterion regarding the board’s responsibility as can be seen in table 4.3.3 was
criterion number 5 which describes ‘the Board conducts annual meetings in a way that
shareholders are able easily ask questions was responded by majority of the respondents
(54.5%) as agree. In addition, 27.3% of the total respondents were revealed their agreements to
the applicability of the criterion answered as strongly agree. Unlike to this, the remaining
18.2% of the respondents were not in a position to decide about the problem.
The last but not least criterion with regard to the responsibilities and duties of the board
supposed to be discharged in the bank as shown in the same table was ‘the board provides to all
its shareholders sufficient and timely information’ is replied by the respondents as follows.
81.8% of the respondents testified their agreement that the criterion is applied, answered as
agree (36.4%) and strongly agree (45.5%). Yet another 18.2% of the respondents were replied
as undecided that means they were in able to respond to the problem.
Table 4.3.2.3.Frequency and Percentage Values of ensuring efficiency and

effectiveness of the board
54
Criteria Yes No
F % F %
1. Orientation and formal training 3 27.3 8 72.7
Sessions
2. Independency 9 81.8 2 18.2
3. Performance evaluation 3 27.3 8 72.7
4. Sufficiency of information and 4 36.4 7 63.6
Time
5. Adequacy of knowledge 8 72.7 3 27.3
Table 4.3.2.3 shows criteria that could enhance the efficiency and effectiveness of the board. In
this part there were some six sample selected criteria by the researcher assumed to be ensuring
the efficiency and effectiveness of the board if they are applied in the bank and with one open-
ended question letting the respondents to add more if there are any.
In response to criterion number 1 as shown in the above table which deals with ‘orientation and
formal training sessions’ as a means to enhance the board’s efficiency and effectiveness,
replied by 72.7% of the total respondents as the bank does not have any formal orientation
program for new board members nor does it organize formal training sessions for existing
board members, they respond as ‘No’. On the other hand, 27.3% of the respondents answered
as Yes. In the same fashion, the result from the interview also displays that the bank did not
have.
Organizations should orient for new directors that include materials and meetings with key
management designed to familiarize new directors with the Company's business, operations,
finances, and governance practices. Organizations should develop a mechanism by which they
55
strengthen the governance skills of their board members. The Board should encourage directors
to participate in education programs to assist them in performing their responsibilities as
directors.
The other criterion suggested to be practiced in the bank as indicated in the above table is
‘
criterion 2, which deals with ‘independency of the board of directors’. It is therefore replied by
81.8% of the respondents as independent directors represent a substantial portion of the total
board in contrast to the remaining 18.2% of the respondents who answered as ‘No’ that is
independent directors are not substantial enough. Hence, as the result itself shows in this
regard, majority of the respondents testified that board members are independent. In addition,
the result obtained from the interview also supports this response.
The corporate governance principles strongly require that a board member should exercise an
independent judgment and be free from any influence to the contrary. “All processes, decision-
making, and mechanisms used should be established so as to minimize or avoid potential
conflicts of interest.”
Replying to criterion number 3, as indicated in the above table states about ‘performance
evaluation’ responded by 27.3% of the respondents as Yes. In other ways, the majority of the
respondents (72.7%) were revealed as ‘No’ that is the board does not carry out annual
evaluation of it self, its committees and its members. The interview result also shows as the
board does not carry out an annual evaluation of it self and its committees.
Performance evaluation is a key ingredient in the management of a board that contributes to its
effectiveness. Therefore every board needs to evaluate it self, its committee, and its members in
56
order to determine whether the organization (in general) is going in the right direction and to
measure its performance. Strengthening this idea, Loursch 1995 stated it as follows:
“The inevitability of change and the fact that even the most talented and well-motivated
directors and managers will find that their best-laid plans do not always work mean that
an empowered board must periodically monitor and evaluate its own and its
organization in general performance.”
According to the Banking Business Proclamation No. 592/2008, board members are jointly and
severally liable to the bank for damage caused by their failure to properly carry out their duties
although it indicates them nothing about the performance evaluation. As a result it advises that
the board should have formal procedures to assess both their own collective performance and
that of individual directors so that boards might usefully consider in the interest of continuous
improvement.
It is no wonder that ‘sufficiency of information and time’ which stated in criterion number 4 in
enhancing the efficiency and effectiveness of the board members is indicated as one of the
major items that should be applied in the bank. In contrast to the should be, however, majority
of the respondents (63.6%) respond as the board members do not have sufficient information
and time that enables them to give strategic guidance of the bank. But, unlike to this, 36.4% of
the respondents assured that the board members are not in short supply of information and time.
In the same fashion, the result of the interview also displays that the board members are very
busy for many of the board members of the bank also work as a board member or chair person
in other organizations in addition to their full time business. This reality has also been obvious
during the research work that most of the board members have taken to much time to fill the
questionnaire while it is a matter of hours or days work.
57
OECD (2005) suggests that the board should be supplied in a timely fashion with information
in a form and of a quality appropriate to enable it to discharge its duties. The effectiveness of a
board (including in particular the role played by the non-executive directors) is dependent to a
substantial extent on the form, timing and quality of the information which it receives. Reliance
purely on what is volunteered by management is unlikely to be enough in all circumstances and
further enquiries may be necessary if the particular director is to fulfill his or her duties
properly. Management has an obligation to ensure an appropriate supply of information. The
contradiction is that, these boards depend for the greater part of the information they need on
the management whose activities they monitor in which it is inversely related to the sufficiency
of the time board members have to spend in the company affairs. That is if they devote
sufficient time, they are not likely to depend too much on a managers’ information and vice
versa.
And the last but not the least criterion advised to be exercised in the bank in order for the board
members be efficient and effective as shown in the above table is criterion number 5 which
states ‘adequacy of knowledge’. As a result, majority of the respondents (72.7%) replied as
‘Yes’ that is the board members know well about the bank and the board functions in contrast
to those who answered as No (27.3% of the respondents). Asked a question for those who
answered as ‘No’ to show the reasons for the in adequacy of knowledge in the open ended
question they forwarded their reasons as; orientation and continuous training is not given.
The Basel committee for Banking Supervision (2006) recommends that having sufficient
knowledge about board functions and the company is a very important element of the good
corporate governance. Being knowledge full is an indicator that the board members can
undertake their functions properly.
58
Table 4.3.2.4.Frequency and Percentage Values of protecting the rights of shareholders
and other stakeholders
Basic rights 1 2 3 4 5
F % F % F % F % F %
1. right to participate in and vote at 2 18.2 6 54.5 3 27.3
general shareholder meetings
2. Supplied with timely, relevant and 2 18.2 7 63.6 2 18.2
material information
3. Pro rata participation in dividends 4 36.4 7 63.6
and other distributions
4. Aligns the long term interests of 3 27.3 6 54.5 2 18.2
employees with the long tern
interest of the bank
5. Implements programs which take 2 18.2 45.5 5 45.5 4 36.4
account of social responsibilities
As shown in the above table 4.3.2.4, a number of criteria aiming at protecting the rights of
shareholders and other stakeholders were stated and the respondents were asked to portray the
level of their agreement with regard to the practical application of these criteria in the bank.
[
Accordingly, criterion number 1 in the above table 4.3.2.4 states about ‘the right to participate
in and vote at general shareholder meetings’ is responded by 18.2% of the total respondents
disagrees. On the other hand, a total of 81.8% of the respondents represent their agreement
replied as agree (54.5%) and strongly agree (27.3%). Therefore, the result shows majority of
the respondents agreed as the shareholders right to participate in and vote at general
shareholder meetings protected.
59
OECD recommends that Shareholders should have the right to participate effectively and vote
in general shareholder meetings and shall be informed of the rules, including voting procedures
that govern general shareholder meetings. Equally important, it suggests that every shareholder
shall be entitled to ask questions, seek clarification on the Company’s performance as reflected
in the annual reports and accounts or in any matter that may be relevant to the Company’s
performance or promotion of shareholders’ interests and to receive explanation by the directors
and/or management.
In response to criterion number 2 in the same table presents about ‘supplied with timely,
material and relevant information’ is responded by 63.6% and 18.2% of the respondents agree
and strongly agree respectively. Where as, the remaining 18.2% of the total respondents
revealed as they were not in a position to decide the level of their agreement, they replied as
undecided.
Shareholders should be furnished with sufficient and timely information concerning the date,
location and agenda of general meetings, as well as full and timely information regarding the
issues to be decided at the meetings. Shareholders should be sufficiently informed on, decisions
concerning fundamental corporate changes such as amendments to the statutes, or articles of
incorporation or similar governing documents of the company, the authorization of additional
shares, and extra-ordinary transactions that in effect result in the sale of the company.
In reply to criterion umber 3, as indicated in the above table states about ‘Pro rata participation
in the dividends and other distributions of the bank (if any)’ responded by 63.6% of the total
respondents agree unlike those who were yet unable to decide, 36.4% of the total respondents.
60
Hence, the result shows that majority of the respondents were agreed that all shareholders
participate pro rata in the dividends and other distribution of the bank, if any.
In reply to criterion number 4 which concerns with ‘Aligning the long term interests of
employees with long term interests of the bank’, 54.5% and 18.2% of the respondents
expressed their agreement replied as agree and strongly agree. In other ways, the
remaining27.3%% of the total respondents was yet unable to decide on the problem.
Corporations should have policies and practices that provide employees with compensation,
including benefits that are appropriate given the nature of the corporation's business and
employees' job responsibilities and geographic locations: When corporations offer retirement,
healthcare, insurance and other benefit plans, employees should be fully informed of the terms
of those plans. Corporations should communicate honestly with their employees about
corporate operations and financial performance and with the future interests.
The other criterion recommended to be implemented in the bank so as to protect the rights of
shareholders and other stakeholders as indicated in the above table is criterion 5, which deals
with ‘Implementing programs which take account of social responsibilities’ is responded by
45.5% and 36.4% of the respondents as agree and strongly agree respectively. On the other
hand, remaining 18.2% of the total respondents portrayed their disagreement answered.
A corporation should be a good citizen and contribute to the communities in which it operates
by making charitable contributions and by encouraging its directors, managers and employees
to form relationships with those communities. It also should be active in promoting awareness
of health, safety and environmental issues, including any issues that relate to the specific types
of business in which the corporation is engaged.
61
Table 4.3.2.5.Frequency and Percentage Values of the roles and responsibilities of the
board committees
Criteria 1 2 3 4 5
F % F % F % F % F %
The audit committee
1. monitors the integrity of financial 8 72.7 3 27.3
Statements
2. reviews the bank’s internal 7 63.6 4 36.4
financial controls
3. reviews the work plan of internal 3 27.3 2 18.2 6 54.5
and external auditors
The risk committee
4. advises the full board on risk 3 27.3 2 18.2 6 54.5
Management
5. reviews the effectiveness of the 2 18.2 5 45.5 4 36.4
internal controls
The remuneration committee
6. ensures that bonus and incentive 3 27.3 6 54.5 2 18.2
schemes motivate employees
7. ensures that the executive 1 9.1 7 63.6 3 27.3
directors and key management
are fairly rewarded
8. reviews the compensation of 3 27.3 5 45.5 3 27.3
board members and of senior
management
The nomination committee
9. establishes succession plans 1 9.1 2 18.2 5 45.5 3 27.3
10. recommends nominees to the 3 27.3 7 63.6 1 9.1
Board
62
As shown in the above table 4.3.2.5, a number of criteria regarding the roles and
responsibilities of the board committee are listed and the respondents were asked to describe
the level of their agreement concerning the extent to which they are carried out.
In response to criterion number 1 in the above table presents about ‘monitoring the integrity of
financial statements’ is responded by 72.7% and 27.3%, of the respondents as agree and
strongly agree respectively in the bank. Hence, this result implies that all of the respondents
show their agreement as this is carried out by the audit committee. In the same fashion, the
result of the interview also displays this result that the audit committee monitors the integrity of
financial statements.
Similarly, the responses for criterion number 2 which is ‘reviewing the bank’s internal financial
controls’ as can be seen from the above table shows that the audit committee reviews the
company’s internal financial controls. This was also replied by 63.6% and 36.4% of the
respondents as agree and strongly agree respectively. Besides, this was also strengthened by the
result found from the interview which indicates that the audit committee carries out a
responsibility of this
In response to criterion umber 3, as indicated in the above table states about ‘Reviewing the
work plan of external and internal auditors’ responded by majority (54.5%) of the respondents
as agree that is the audit committee reviews the work plan of the external auditors and the
internal auditors, and reviews the result of their work. On the other hand, 27.3% of the total
respondents portrayed their disagreement replied as disagree. Yet the remaining 18.2% of the
respondents still didn’t take any decision to say anything about the question, revealed as
undecided.
63
The audit committee is responsible to review the findings of any internal investigations by the
internal auditors into matters where there is suspected fraud or irregularity or a failure of
internal control systems of a material nature and reporting the matter to the Board and review
the performance of the external auditors. It reviews and approves the annual work plan of the
external auditors; supervise its qualifications, and effectiveness. And it supervises the carrying
out of the internal audit, receive and evaluate their work plan and any reports deemed relevant
or significant for the Company.
In reply to criterion number 4 as shown in the above table which deals with’ advising the full
board on risk management’, replied by 45.5% and 36.4% of the total respondents as the risk
committee advises the full board on risk management’, they respond as agree and strongly
agree respectively. Where as, the remaining 18.2% of the respondents revealed as disagree.
The 5th criteria shown in the above table which discusses about ‘reviewing the effectiveness of
the internal controls’ is answered by 18.2% of the total respondents as disagree. Where as,
27.3% of the respondents were not able to decide on this item. On the other hand the remaining,
in deed the majority, 63.6% of the respondents were responded as agree that is the audit
committee reviews the effectiveness of the internal controls. Therefore, as the result shows
more than half of the respondents showed their agreement that the item is implemented in the
bank.
Similarly, the responses for criterion number 6 which is ‘Ensuring that bonus and incentive
schemes motivate employees’ as can be seen from the above table shows that majority (72.7%)
of the respondents represent their agreement, answered as strongly agree (18.2%) and agree
64
(54.5%). Where as, the remaining 27.3% of the total respondents were still unable to decide on
the problem.
There should be a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual directors. Bonus and
incentive schemes should also be ensured that motivate employees to focus on the long term
well being of the company. No director should be involved in deciding his or her own
remuneration. It is the responsibility of the remuneration committee.
The seventh criterion indicated in the above table also asserts about ‘ensuring that the executive
directors and key management are fairly rewarded’ is responded by 18.2% of the respondents
as disagree. Where as, 27.3% of the respondents were not able to decide on this item. On the
other hand the remaining, in deed the majority, 54.5% of the respondents were responded as
agree. Therefore, the result shows more than half of the respondents showed their agreement
that that is the remuneration committee carries out its responsibility to ensure that the executive
directors and key management are fairly rewarded.
The finding of criterion 8 as indicated in table 4.3.5 which deals with ‘Reviewing the
compensation of board members and of senior management’ shows that majority of the
respondents replied as agree and strongly agree, 45.5% and 27.3% each respectively. Only (but
not insignificant) 27.3% of the respondents responded as disagree. There fore, it can be inferred
from this result that the remuneration committee reviews the compensation of board members
and of senior management to ensure that it is consistent with the bank’s culture, long term
objectives, strategy, and control environment.
The remuneration committee should review the compensation of members of the board, senior
management and other key personnel, and should ensure that such compensation is consistent
65
with the bank's culture, control environment, and long-term objectives and strategy to mitigate
potential conflicts of interest and to provide assurance to shareholders and other stakeholders.
The other criterion shown in the above table is item number 9 which asserts ‘Establishing
succession plans’. As can be seen from that table, most of the respondents (72.8%) replied that
the nomination committee establishes (and the board approves) succession plans for senior
executives and the chairman and clear procedures for the appointment of senior staff and the
recruitment of new board members, 45.5% (agree) and 27.3% (strongly agree) each
respectively. On the other hand, the remaining 9.1% and 18.2% of the total respondents were
revealed as disagree and undecided respectively. In the same fashion, the result of the interview
also displays that the nomination committee establishes succession plans for senior executives
and the chairman and clear procedures for the appointment of senior staff and the recruitment
of new board members.
The Basel Committee for the Banking Supervision advises that nomination committee should
have to establish a clear succession plan for its chairman and chief or senior executives and
clear procedures for the appointment of senior staff and the recruitment of new board
members in order to avoid unplanned and sudden departures, which could undermine the
company’s and shareholders’ interest.
The finding of criterion number 10 as indicated in table 4.3.5 which deals with ‘recommending
nominees to the board’ also shows that majority of the respondents replied as agree and
strongly agree, 63.6% and 9.1% each respectively. Where as, the remaining 27.3% of the
respondents were responded as undecided, they were not in a position to represent the level of
their agreement, however. There for, from this result it can be conclude that the nomination
66
committee recommends about the nominees to the board. Similarly, this result is also
strengthened by response obtained from the interview.
Table 4.3.2.6.Frequency and Percentage Values of Transparency and disclosure

Criteria Yes No
F % F %
1. A report on the activities of 3 27.3 8 72.7
each of the board committees
2. Explaining the risk exposures and its 11 100
strategy for managing risk
3. Having a policy in place to 11 100
ensure prompt disclosure
4. Publishing an account of business 9 81.8 2 18.2
objectives and organizational and
governance structures
5. Explaining the incentive structures and 5 45,5 6 54.5
remuneration practices
Table 4.3.2.6 shows some criteria which their applicability is advised so as to enlarge the
transparency and material disclosure of the bank. Hence, respondents were asked to portray the
level of their agreement with regard to the practical application of these criteria in the bank.
Accordingly, criterion 1 in the above table 4.3.2.6 states about ‘containing a short report on the
activities of each of the board committees’ is responded by 72.7% of the respondents as ‘No’.
In other ways, the remaining 27.3% of the total respondents were revealed their answer as
‘Yes’. In addition to the response obtained from the questionnaire the result from the analysis
of the secondary data (from the annual report) also revealed that the bank’s annual report does
not contain a report on the activities of each of the board committees.
67
In response to criterion number 2 in the same table presents about ‘explaining the risk
exposures and its strategy for managing risk’, is replied by 100% of the respondents as the
bank’s annual report includes a section explaining the bank’s risk tolerance, its risk exposures,
and its strategy for managing risk. And this was also indicated by the interview result that the
risk exposures of the bank and the strategies used to manage them are explained in the bank’s
annual report. In addition, the result from the analysis of the secondary data (from the annual
report) also revealed that the bank’s annual report includes a section explaining the bank’s risk
tolerance, its risk exposures, and its strategy for managing risk.
The other criterion shown in the above table is criterion number 3 which states ‘having a policy
in place to ensure prompt disclosure’. As can be seen from that table, all of the respondents
replied that the bank has a policy in place to ensure prompt disclosure of material, unforeseen
events, or developments which could affect the bank’s performance. And this was also
strengthened by the information gained from the interview session that the bank has fulfilled
this criterion.
The finding of criterion 4 as indicated in table 4.3.2.6 which deals with ‘publishing an account
of business objectives and organizational and governance structure’ shows that majority of the
respondents (81.8%) replied as ‘Yes’. On the other hand, 18.2% of the respondents reacted to
the contrary that the bank does not publish an account of its business objectives and its
organizational and governance structure. So from this it can be understood that the bank
publishes an account of its business objectives and its organizational and governance structure.
In addition, the information acquired from the interview session and analysis of the secondary
68
data shows as the bank publishes an account of its business objectives and its organizational
and governance structure.
Criterion number 5, ‘explaining the incentive structure and remuneration practices’ is replied
by 54.5% of the total respondents that the bank’s annual report does not explain the incentive
structure and remuneration practices for senior management, as well as the actual amounts paid
to senior managers and to directors in contrast to the remaining 45.5% of the respondents
answered as ‘Yes’. In addition to the response obtained from the questionnaire the result found
from the analysis of the secondary data (from the annual report) also revealed that the incentive
to senior managers and to directors is not explained in the bank’s annual report.
Information about the incentive structure of the bank (remuneration policies, executive
compensation, bonuses, and stock options) should be included in the bank’s annual report. The
board should annually disclose in its annual report, its policies for remuneration including
incentives for the board and senior management particularly the Quantum and component of
remuneration for directors including non executive directors on a consolidated basis.
CHAPTER FIVE
69
5. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
This chapter deals with conclusions and recommendations respectively. Hence, the major
findings of the study were analyzed and discussed in chapter four give a way to draw a
conclusion. Finally, possible recommendations for the major problems found from the study are
forwarded on the basis of the findings of the study.
5.1. Summary
According to the discussion and analysis of the data presented in chapter four, the following
findings were drawn.
With regard to developing a culture of good corporate governance, the finding revealed that:
The bank establishes internal controls and procedures to govern the work and behavior of its
entire department.
The bank has a Code of Business Ethics which all employees are required to sign when they
join the bank although it is not published in its (the bank’s) website.
The board creates a “Corporate Governance Committee”, whose mandate includes
monitoring whether the bank is fulfilling its commitments to good governance.
The bank does have a formal “Compliance Department”, with a mission to ensure that
employees understand and implement the bank’s internal procedures and play their part in
discharging the bank’s external obligations.
The bank has an on-going program to raise employee awareness of corporate governance
issues and the role which every employee can play in strengthening good governance with in
the bank.
[
70
The finding of the study also disclosed that the board discharges its roles and responsibilities
effectively. That:
The board officially approves a set of performance indicators, which can be used to measure
the bank’s progress and also the performance of the management.
The board approves and monitors the strategic objectives of the bank and the values and
standards of work with the interests of stakeholders.
The board ensures that the executive management implements strategic policies of the bank
and prevent the activities and relationships that undermine governance.
The board has a sound understanding of the risks of the bank and ensures that management
has established strong systems to monitor those risks. But, the board failed to hold specific
discussions on the risks and the adequacy of internal control procedures, compliance, and anti-
money laundering policy in the bank, however.
The board conducts annual meetings (and any extra-ordinary meetings) in a way that
shareholders are able easily ask the board questions about, for example, the selection of
auditors, auditors remuneration, etc.
The board provides to all its shareholders sufficient and timely information concerning the
date, location and agenda of the general meeting.
Concerning the extent to which the bank ensures the efficiency and effectiveness of the board,
the study revealed that there are still some limitation; The bank does not have formal
orientation program for new board members and formal training sessions for existing board
members, the board does not carry out annual evaluation of it self, its committees and its
71
members; and board members do not have sufficient information and time that enables them to
give strategic guidance to the bank. On the other hand, the finding indicated that there are
strong sides; majority of the board members are independent directors and board members have
adequate knowledge of the bank and the board functions.
About protecting the rights of shareholders and other stakeholders, the study represented that
the bank is doing well in allowing shareholders and other stakeholders effectively participate in
exercising their rights. Majority of the respondents portrayed their agreement that all
shareholders have the right to:
Participate in and vote at general shareholder meetings; get timely, material and relevant
information regarding the issues to be addressed at the general meetings; and participate pro
rata in divided. And other stakeholders (employees) have the right to align their long term
interests with the long term interests of the bank, and not be discriminated (the general public).
Regarding the degree to what extent the board committees are carrying out their roles and
responsibilities, the research showed that it is to be encouraging. Majority of the respondents
revealed their agreement that they carried out well.
With regard to the transparency and disclosure of material information, the finding represents
that the practice is good although there is still a problem. The good practice is that:
The bank’s annual report includes a section explaining its risk exposures and its strategy for
managing the risks,
The bank has a policy in place to ensure the prompt disclosure of material, unforeseen
events, or developments which could affect the bank’s performance,
72
The bank publishes an account of its business objectives and its organizational and
governance structure, and
On the other hand, the problem is that:
The bank’s annual report does not contain a report on the activities of each of the board
committees,
The bank’s annual report does note explain the incentive structure and remuneration
practices for senior management, as well as the actual amounts paid to senior managers and to
directors.
5.2. Conclusion
Good corporate governance is not just a matter of prescribing particular corporate structures
and complying with a number of hard and fast rules. There is a need for broad principles. Al1
concerned should then apply these flexibly and with common sense to the varying
circumstances of individual companies. In this respect, the finding portrayed that there is a
culture of good corporate governance through out the bank.
Regarding the extent of the implementation of the roles and responsibilities of the board, the
finding of the study disclosed that the board is effective in discharging its roles and
responsibilities. The major roles and responsibilities of the board entails approving and
monitoring the bank’s strategy, setting performance indicators for management and the bank’s
progress, and ensuring the implementation of strategic policies. Board members also need to
understand the risks which the bank is taking and review internal controls. The board’s
responsibilities also extend to protecting shareholders rights, and the wider community.
73
Similarly, the finding showed that the extent to which the board committees are discharging
their roles and responsibilities is to be encouraging.
Concerning the degree to what extent the bank ensures of the efficiency and effectiveness of
the board, the study revealed that there are some problems yet; The bank does not have formal
orientation program for new board members and formal training sessions for existing board
members, the board does not carry out annual evaluation of it self, its committees and its
members; and board members do not have sufficient information and time that enables them to
give strategic guidance to the bank. On the other hand, the finding showed that the bank has
some strong sides; majority of the board members are independent directors and board
members have adequate knowledge of the bank and the board functions.
About protecting the rights of shareholders and other stakeholders, the study represented that
the bank is doing relatively well in allowing shareholders and other stakeholders effective
participation in exercising their rights.
The finding also represented that the bank has a good practice of transparency and disclosure of
material information though there is still a problem.
Generally speaking, the extent of the application of the corporate governance principles in the
Lion International Bank is encouraging even though it (the bank) has still a problem with
regard to ensuring the efficiency and effectiveness of the board and concerning with the
transparency and disclosure of material information.
74
5.3. Recommendations
Based on the major findings of the study and the conclusions drawn, the researcher suggested the
following recommendations.
If a bank is to operate efficiently and effectively, there needs to be a properly organized and
coherent system of governance procedures and governance structures. Since banks are complex
institutions, which are used to operating under strictly controlled conditions, it is difficult for a bank
to organize such a coherent system of governance. Board members need to be diligent and capable
and their performance needs to be assessed. As a result, the following points are suggested as
recommendations for the existing problem.
The bank should have formal orientation program for new board members and formal
training sessions for existing board members. To be effective, new directors need to have a
good deal of knowledge about the company and the industry within which it operates. An
orientation program should be available to enable new directors to gain an understanding of:
the company’s financial, strategic, and operational and risk management position,
governance practices, the rights, duties and responsibilities of the directors, the roles and
responsibilities of senior executives, and the role of board committees. The bank should also
develop a mechanism by which the board members strengthen their governance skills.
Directors should have access to continuing education to update and enhance their skills and
knowledge. Even the Board it self should encourage directors to participate in education
programs to assist them in performing their responsibilities as directors.
The board should carry out annual evaluation of it self, its committees and its members.
Performance evaluation is a key ingredient in the management of a board that contributes to
75
its effectiveness. Meaningful board evaluation requires an assessment of the effectiveness of the
full board, the operations of board committees and the contributions of individual directors. The
performance of the full board should be evaluated annually, as should the performance of its
committees. The board should conduct periodic – generally annual – self-evaluations to
determine whether it and its committees are following the procedures necessary to function
effectively in order to determine whether the organization (in general) is going in the right
direction and to measure its performance.
Board members should have sufficient information and time that enables them to give
strategic guidance to the bank. To effectively carry out their responsibility of corporate
governance, board members particularly true with out side directors who spend much of
their time out side the company which they serve as board members must continuously be
supplied with the necessary information that enables them to give strategic guidance of the
bank. The effectiveness of a board (including in particular the role played by the non-
executive directors) is dependent to a substantial extent on the form, timing and quality of
the information which it receives. In this regard the corporate governance principles state
that:
“Board members should act on a fully informed basis, in good faith, due diligence and
care, and in the best interest of the company and the share holders.”
Transparency is essential for sound and effective corporate governance. As set out in existing
Basel Committee guidance on bank transparency, it is difficult for shareholders, other
stakeholders and market participants to effectively monitor and properly hold accountable the
board of directors and senior management when there is a lack of transparency. To ensure
transparency and disclosure of its material information, therefore, the bank’s annual report
76
should disclose the activities of each of the board committees and explain the incentive
to senior managers and to directors.
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Appendix - A
Addis Ababa University
School of Business and Public Administration
82
MBA Program (graduate student)
Questionnaire to be field by the Board members of Lion International Bank
Dear Respondent,
This questionnaire is designed to gather data on “the application of corporate governance
principles in the Ethiopian privet commercial banks, the case of Lion International Bank.
The data to be collected through the questionnaire is highly valuable to meet the objectives of
this study. Therefore, you are kindly requested to fill in and return the questionnaire. The
information you supply would be used for academic purpose only and will be kept confidential.
Thank you in advance,
I. General information about the respondents
The following questions concern about your personal information. Completion of this
information is voluntary and its confidentiality is assured. No individual data will be reported.
1. Your sex, Male Female

2. Your marital status, married single other____________
3. Your age group, under 30 30 to 45 45 to 60
60 or older
4. Your highest level of education, diploma degree masters degree

PhD
5. Your work experience_____________________________
II. Questions about the corporate governance principles
General guide lines
83
√ ) sign to appropriate space of particular score, which is suitable to your

Put a tick (√
agreement about the following statements.
1.1 Developing a culture of good governance throughout the bank

Criteria Yes No
1. The bank establishes internal controls and procedures to govern the work
and behavior of all its departments
2. The bank has a Code of Business Ethics which all employees are required to
sign when they join the bank
3. The board creates a “Corporate Governance Committee,” whose mandate
includes monitoring whether the bank is fulfilling its commitments to good
governance
4. The bank have a formal “Compliance Department” with a mission to ensure
that employees understand and implement the bank’s internal procedures
and play their part in discharging the bank’s external obligations
5. The bank has an on-going program to raise employee awareness of
corporate governance issues and the role which every employee can play
in strengthening governance within the bank
► Please specify your opinion about the culture of your bank’s corporate governance in
general________________________________________________________________
______________________________________________________________________
______________________________________________________________________
___________________________________________________________________ .
1.2 Roles and responsibilities of the board
The range scores are 1 for strongly disagree, 2 for disagree, 3 for undecided, 4 for agree,
and 5 for strongly agree with the statement.
84
Criteria 1 2 3 4 5
1. The board officially approves a set of Key Performance Indicators, which

can be used to measure the bank’s progress and also the performance of
the management team
2. The board approves and monitors the strategic objectives of the bank and
the values and standards of work with the interests of stakeholders
3. The board ensure that the executive management implements strategic

policies of the bank and prevent the activities and relation ships and
attitudes that undermine governance
4. The board has a sound understanding the risks of the bank and ensures that
management has established strong systems to monitor those risks
5. Annual Meetings (and any extra-ordinary meetings) are conducted in a

way that shareholders are able easily to ask the board questions about, for
example, the selection of directors, their remuneration.
6. The board provides to all its shareholders sufficient and timely information
concerning the date, location and agenda of the general meeting
► If you agree with Q4 Above, please specify some of the activities and relationships
and attitudes that undermine or diminish governance____________________________
______________________________________________________________________
_______________________________________________ .
1.3 Ensuring efficiency and effectiveness of the board
Criteria Yes No
1. The board members are educationally qualified
85
2. The bank has a formal orientation program for new board members, and
does it organize formal training sessions for existing board members
3. Independent directors represent a substantial proportion of the total
Board
4. The board carries out annual evaluation of itself, its committees and its
Members
5. all members of the board have sufficient information and time that enables them to
give strategic guidance of the bank
6. the board has adequate knowledge of the bank and the board functions
► If there are any other please specify them______________________________
___________________________________________________________________
_____________________________________________________________ .
1.4 Protecting the rights of shareholders and other stakeholders
86
Basic rights of shareholders 1 2 3 4 5
1. All shareholders have the right to participate in and vote at general
shareholder meetings, including for the election of directors
2. All shareholders are provided with timely, material and relevant
information regarding the issues to be addressed at shareholder meetings
and with respect to the affairs of the bank generally
3. All shareholders participate pro rata in the dividends and other distributions
of the bank, and in the assets of the bank in the event of liquidation
4. The bank takes specific steps to align the long term interests of
employees with the long term interests of the bank
5. The bank is implementing programs which take account of social,
charitable or other non-traditional objectives which may serve the interest
of the bank, its employees, or community in other ways
1.5 Internal structures: the roles and responsibilities of committees of the board
87
Items 1 2 3 4 5
Audit committee
1. The audit committee monitors the integrity of financial statements
2. The audit committee reviews the bank’s internal financial controls
3. The audit committee reviews the work plan of the external auditors and
the internal auditors, and reviews the results of their work
Risk committee
4. The risk committee advises the full board on risk management
5. The risk committee reviews the effectiveness of the internal controls
Remuneration committee
6. The remuneration committee ensures that bonus and incentive schemes
motivate employees to focus on the long-term well-being of the

company rather than short-term objectives
7. The remuneration committee ensures that the executive directors and key
management are fairly rewarded
8. The remuneration committee reviews the compensation of board

members and of senior management to ensure that it is consistent with the
bank’s culture, long-term objectives, strategy, and control environment
Nominations committee
9. The committee establishes (and the board approves) succession plans for
senior executives and the chairman and clear procedures for the
appointment of senior staff and the recruitment of new board members
10. the committee recommends nominees to the board
88
1.6 Transparency and disclosure
Criteria Yes No
1. The bank’s annual report contains a short report on the activities of the
board committees
2. The bank’s annual report includes a section explaining its risk exposures
and its strategy for managing risk
3. The bank has a policy in place to ensure prompt disclosure of material,

unforeseen events, or developments which could affect the bank’s
performance
4. The bank publishes an account of its business objectives and its

organizational and governance structure
5. The bank’s annual report explain the incentive structure and

remuneration practices for senior management, as well as the actual
amounts paid (either in cash or in stock) to senior managers and to directors
Please write down your opinion about the corporate governance principles and the relevance of
complying with these principles in general
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
___________________________________________________________ .
Thank you again,
Appendix - B
Addis Ababa University
89
School of Business and Public Administration
MBA Program (graduate student)
Interview questions with the Lion International Bank’s Board members and Senior
Manager and the board secretary
These interview questions are prepared for the board members and the senior manager and the
board secretary of the bank to gather information about the extent of the application of
corporate governance principles in banks in the Lion International Bank. Your cooperation is
highly desirable and information provided will be kept confidential.
1. Do you think the bank has a risk exposure?
2. Does the bank disclose its risk exposures, if any, to the public?
3. What do you think are the strategies that the bank devices to manage these risks, if
any?
4. Do you believe the nomination committee recommends nominees to the board?
5. What do you think about the nomination committee to establish succession plans for
the senior executives and the chairman and procedures for the appointment of senior
staff and the requirement of new board members?
6. Do you think the remuneration committee ensures that bonus and incentive schemes
motivate employees of the bank?
7. What do you think about the audit committee reviews the bank’s internal financial
controls?
9. What can you say about the board members sufficiency of information and time to
90
carry out their functions?
10. What do you believe about the board to undertake performance evaluation of it self,
its committees and its members?
11. Do you think the bank aligns the long-term interests of the employees with its long-
term interests?
12. Is there a formal compliance department with in the bank?
13. What can you say about the existence of a corporate governance committee with in
the bank?
14. What do you think are about the educational qualification of the board members?
15. Do you think the bank publishes an account of its business objectives and its organizational
and governance structure?
16. Do you believe the bank has a policy in place to ensure prompt disclosure of material
information?
91

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ADDIS ABABA UNIVERSITY

SCHOOL OF GRADUATE STUDIES

A STUDY ON THE APPLICATION OF CORPORATE GOVERNANCE

(THE CASE OF LION INTERNATIONAL BANK)

A Thesis Submitted to the School of Graduate Studies of the

Name: Alem Gebremedhin

Name: Abebe Yitayew (Asst. Prof.)

Place of submission: Addis Ababa, June 2011.

Approved by Board of Examiners:

Abebe Yitayew (Asst. Prof.) _______________ _________________

Advisor Signature Date

_______________________ ______________ _________________

Examiner Signature Date

_______________________ ______________ _________________

Examiner Signature Date

necessary and available materials I need.

providing moral and material support.

CHAPTER ONE_ INTRODUCTION

1.1. Background of the study……………………………………………………………………………………………..1

Table 4.3.1.1. Age group ............................................................................................................................. 44

Appendix-A: Questionnaire for the Board Members of LIB

LIB: Lion International Bank

OECD: Organization for Economic Cooperation and Development

Key words: corporate governance, corporate governance principles.

1.1 Background of the study

institutional investors. Increases in international and/or internal portfolio investments and

development phases of companies on a regular basis, began to improve. Market participants

and standards, is defined as “principles of corporate governance”. The principles of corporate

specifies their obligations (Massie, 2000).

on the company’s behavior. The impact of institutional shareholders on the company’s

management is increasing continuously in the developed markets, in particular. On the other

performance of the company leading to development is attributable, to a great extent, to many

pays back to the company’s participants as an economic contribution (OECD, 1999).

with long-term strategies (Claessens, 2006).

corporate governance principles is deemed an important ingredient of bank operation, the

comply in order to be competitive enough. Compliance with the principles of corporate

suitable ground for procuring long-term financing. Implementation of governance principles

stakeholders (Massie, 2000).

may translate in to more efficient and streamlined operations.

changing conditions of competition.

principles identified by the Organization for Economic Co-operation (OECD) and

Development and the Basel committee for Banking Supervision.

1.2 Statement of the Problem

enhance the banks operations.

safeguard depositors’ funds, corporate governance for banking organization is of great

groups and ensuring investor confidence (Massie, 2000).

are extremely important engines of economic growth

the most important source of finance for the majority of firms.

usually the main depository for the economy’s savings.

adopted for banks.

attention in executive management development programs rather.

to be answered as a result of the research study:

1. Does the bank have a culture of good corporate governance?

2. To what extent the board is discharging its roles and responsibilities?

4. Are the rights of shareholders and other stakeholders protected?

1.3 Objective of the Study

ii. Specific objectives

The specific objectives of the study include:

To study whether the bank develops a culture of good corporate governance

recommendations to management of the organization on how to improve the extent

of the application the corporate governance principles

1.4 Scope of the Study

1.5 Significance of the Study

Abebe Yitayew (Asst. Prof.) _ ___

_____ _

_____ _